The government is thinking about increasing the tax on petrol to raise additional revenue rather than to promote conservation. The tax will result in the greatest amount of tax revenue if the price elasticity of demand for petrol equals

Question

Quizplus · Accepted Answer

To maximize tax revenue, the government needs to choose a price elasticity of demand for petrol that is relatively inelastic. This is because a small increase in price will lead to a relatively small decrease in quantity demanded, meaning that the total revenue collected from the tax will be higher.

A price elasticity of demand of 0.5 indicates relatively inelastic demand for petrol, meaning that a 1% increase in price will result in a less than 1% decrease in the quantity demanded. Therefore, D is the best choice for maximizing tax revenue.

The Government Is Thinking About Increasing the Tax on Petrol