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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Suppose the current price of gasoline at the pump is $4 per gallon and that 1 million gallons are sold per day. A politician proposes to add a $1 tax to the price of a gallon of gasoline. She says that the tax will generate $1 million in tax revenues per day. What assumption is she making?

To determine

Identify the demand elasticity.

Explanation

In this case, the politicians suggest to impose $1 as a tax on the price of gasoline. The current price of gasoline is $4 per gallon. Hence, they expect that the imposition of tax will create $1 million as government revenue. This is because here the politicians consider the gasoline has a perfectly inelastic demand...

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