The government is thinking about increasing the tax on petrol to promote conservation. The tax will discourage the consumption of petrol most when the price elasticity of demand equals

Question

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When the price elasticity of demand equals 2.0, it means that a 1% increase in the price of petrol will result in a 2% decrease in the quantity demanded of petrol. This high elasticity suggests that consumers are highly responsive to changes in the price of petrol, and therefore an increase in tax on petrol will be effective in discouraging consumption and promoting conservation.

The Government Is Thinking About Increasing the Tax on Petrol