Suppose the price of gasoline is $3.50 per gallon, the quantity of gasoline demanded is 150 billion gallons 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 $1.00 per gallon, which increases the price of gasoline by $0.75 per gallon.What is the new equilibrium quantity of gasoline demanded after the tax is imposed?
A)109.72 billion gallons per year
B)127.25 billion gallons per year
C)148.27 billion gallons per year
D)161.61 billion gallons per year

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is used: % change in quantity demanded = elasticity * % change in price. The % change in price is ($0.75/$3.50) * 100 = 21.43%. The % change in quantity demanded is -0.06 * 21.43% = -1.2858%. The new quantity demanded is 150 billion * (1 - 0.012858) = 148.27 billion gallons.

Suppose the Price of Gasoline Is $3