Suppose the government increases the tax on gasoline in order to raise revenue. Since raising the gasoline tax would increase the price of gasoline, the government must be assuming that the:
A) demand for gasoline is price elastic
B) demand for gasoline is price inelastic
C) demand for gasoline is price unit elastic
D) tax on gasoline will not affect the consumption of gasoline

Question

Quizplus · Accepted Answer

The government must be assuming that the demand for gasoline is price inelastic because they are increasing the tax on it, which will result in a price increase. If demand were price elastic, consumers would be more likely to respond to the price increase by reducing their consumption of gasoline, which would reduce the revenue collected from the tax. Price inelastic demand means that consumers will continue to purchase gasoline despite the price increase, which will result in higher revenue for the government.

Suppose the Government Increases the Tax on Gasoline in Order