In order to discourage the consumption of gasoline, the government is proposing to raise its price...

In order to discourage the consumption of gasoline, the government is proposing to raise its price through a gasoline tax. To what level must gasoline price be raised if the government wants to reduce consumption of gasoline by 15 million gallons?

Linear demand curve: 30 = 9.75 – (-0.25)*3
Slope = -0.25
Price Elasticity = -4

Expert Solution

The current elasticity of demand is given as -4. This means that for each 1 increase (decrease) in gasoline price, the demand increases (falls) by 4.

The current demand is also given at 30 million right now. The government wants it to be 15 million. Thats a decrease of (5-30)/30=-50%. We know that

Price elasticity of demand= %change in demand/%change in price.

Using this formula and entering the values, we get

-4=-50/%change in price

%change in price=50/4=12.5.

This means that price must be increased by 12.5% for the demand to drop by 50%.

Rahul Sunny answered 2 years ago

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