Q = -0.25 x %P. So if price is to increase, how much could it rise for sales
to fall by 10% (we assume that the entire tax shows up in the
price at the pump).
We know that %Q = -0.25 x %P. So if price is to increase, how much could it rise for sales
to fall by 10% (we assume that the entire tax shows up in the
price at the pump).
%10 = -0.25 x %P or %P = 10%/-0.25 = 40% or .4
This means that the price of gasoline can increase by 40%. Since the price is currently $1.00 this means a tax of 40 cents.
15. The government is considering an increase in the tax on gasoline. They know that the own-price elasticity of demand for gas is .25. The current price is $1.00 per gallon. They are willing to allow the quantity of gas sold to fall by 10%. What tax increase (in cents per gallon) would lead to a 10% reduction in quantity demanded? (we assume that the entire tax shows up in the price at the pump)