Suppose the price of gasoline is $1.25 per litre, the quantity of gasoline demanded is 40 billion litres per year, the price elasticity of demand for gasoline is -0.06, and the federal government decides to increase the excise tax on gasoline by $0.75 per litre, which increases the price of gasoline by $0.50 per litre.What is the new equilibrium quantity of gasoline demanded after the tax is imposed?
A)37.67 billion gallons per year
B)38.91 billion gallons per year
C)39.21 billion gallons per year
D)40.52 billion gallons per year

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is: % change in quantity demanded = elasticity * % change in price. The % change in price is ($0.50/$1.25) * 100 = 40%. The change in quantity demanded is -0.06 * 40% = -2.4%. The new quantity demanded is 40 billion litres * (1 - 0.024) = 39.04 billion litres, which is approximately 39.21 billion gallons per year.

Suppose the Price of Gasoline Is $1