Question

Economists estimate that the short-run price elasticity of demand for gasoline is -0.3, and the long-run price elasticity of demand is -1.5. If the government increases the gas tax, demand for gasoline will

Group of answer choices

decrease less in the long-run than in the short-run.

increase in the short-run and decrease in the long-run.

decrease in the short-run and increase in the long-run.

decrease more in the long-run than in the short-run.

Answer 1

Price Elasticity of demand is an economic parameter which is used to measure by how much percent quantity demanded will change on any percentage change in price.

Hence, elasticity of demand in short run is -3.0 which is greater than the elasticity of demand in long run which is -1.5. Now, greater the elasticity means a small change in price will lead to higher change in quantity demanded.

And an increase in gas tax means increas in prices which will lead to decrease in quantity demanded. But, elastic6of demand is more in short run rhan long run. So, due to increase in price of gas; quantity demanded will lead to decrease more in short run and comparatively less in long run.

Hence, option A is correct that is decrease less in the long run then in the short run.