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.How much revenue does the federal government receive from the tax?

Question

Quizplus · Accepted Answer

To calculate the revenue from the tax, we need to first calculate the new price of gasoline:

New price = $1.25 + $0.50 + $0.75 = $2.50 per litre

Now we can calculate the new quantity of gasoline demanded using the price elasticity of demand formula:

% change in quantity demanded = (price elasticity of demand) x (% change in price)

Since we know that the % change in price is 50/125 = 0.4, we can solve for the % change in quantity demanded:

-0.06 x 0.4 = -0.024

This means that the new quantity demanded will be:

New quantity = 40 billion litres x (1 - 0.024) = 39.04 billion litres

The revenue from the tax is simply the tax per litre multiplied by the new quantity demanded:

Revenue = $0.75 x 39.04 billion litres = $29.41 billion

Therefore, the best choice is (C).

Suppose the Price of Gasoline Is $1