Suppose the current price of gasoline at the pump is $1 per gallon and that one million gallons are sold per month. A politician propers to add a 10 -cent tax to the price of a gallon of gasoline. she says the tax will generate $100,000 tax revenues per month (one million gallons x $0.10= $100,000). What assumption is she making?
2006-11-02 15:30:39 · 3 answers · asked by Erin H 1 in Social Science ➔ Economics
She is assuming that the quantity of gasoline won't change, even the price will rise to $1.10.
This is a reasonable assumption in the short-run. When gas prices rose recently, only some people can switch to alternatives such as public transport, walking/cycling to work etc. However, over time, higher gas prices are an incentive for people to buy smaller cars or to move closer to where they work or to get a job closer to home. Therefore, while the quantity won't change initially, it will over time, thus making her assumption wrong over the medium to longer term.
2006-11-02 17:06:04 · answer #1 · answered by eco101 3 · 1⤊ 0⤋
That people won't buy Hondas or Toyotas.
2006-11-02 15:33:49 · answer #2 · answered by crystal89431 6 · 0⤊ 0⤋
inelastic demand. Can I have my points now, please?
2006-11-02 15:36:56 · answer #3 · answered by silentnonrev 7 · 2⤊ 0⤋