Jim has estimated elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would:
A)lower tax revenue in both the short and long run.
B)raise tax revenue in both the short and long run.
C)raise tax revenue in the short run but lower tax revenue in the long run.
D)lower tax revenue in the short run but raise tax revenue in the long run.

Question

Jim has estimated elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would:
A)​lower tax revenue in both the short and long run. 
B)raise tax revenue in both the short and long run.
C)raise tax revenue in the short run but lower tax revenue in the long run. 
D)​lower tax revenue in the short run but raise tax revenue in the long run.

Quizplus · Accepted Answer

The estimated elasticity of demand for gasoline is -0.7 in the short run, indicating that a decrease in taxes on gasoline will increase the quantity demanded of gasoline in the short run, but not significantly. Therefore, the tax revenue will decrease in the short run. 
However, in the long run, the estimated elasticity of demand for gasoline is -1.8, indicating a greater responsiveness to changes in the price of gasoline. Consequently, a decrease in taxes will result in a higher increase in quantity demanded of gasoline in the long run, leading to a higher increase in tax revenue in the long run. Overall, the tax revenue will decrease in the short run but increase in the long run after the decrease in taxes on gasoline.

Jim Has Estimated Elasticity of Demand for Gasoline to Be