Answer to Question #247931 in Microeconomics for Gelle

Question

Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens to consumer expenditures (in other words, price times quantity purchased) if the government increases the federal gasoline tax?

 

a. Consumer expenditures on gasoline increase over the short run and long run

b. Consumer expenditures on gasoline increase over the short run and decline over the long run

c. Consumer expenditures on gasoline decrease over the short run and long run

Answer 1

b. Consumer expenditures on gasoline increase over the short run and decline over the long run

During the short-run, customers may not have an alternative to sort out issues related with the product, however as time goes by customers will start finding solution and alternative to the situation, hence decrease in the quantity demanded.