Question

You are given the following data on P and O for gasoline both before and affer the imposition of a per gallon tax on producers in the local market for gasoline Q 40 gallons -35 gallons -$3/gallon $4/gallon Before the Tax After the Tax

Answer 1

Elasticity = % change in quantity/ % change in price

= (35-40)/40 / (4-3)/3

= -15/40

= -0.375

C) Elasticity = dq/q / dp/p

= dq/dp * p/q

= -0.375

Option B

dq/dp = -0.375*60.39*P^-1.375

P/Q = P /60.39*P^-.0375 = P^1.375/60.39

dq/dp * P/Q = -0.375

D) inelastic, consumer

As the tax revenue increases, it means that demand decreased at less than proportional increase in price which implies relatively inelastic demand. The lower the elasticity, the greater is the incidence of tax Bourne by the consumer.