Sally Henin Has a Price Elasticity of Demand for Gasoline

question 66

Essay

Sally Henin has a price elasticity of demand for gasoline of -0.8. Her income elasticity for gasoline is 0.5. Sally's current income is $40,000 per year. Sally currently spends $800 per year on gasoline. The price of gasoline is currently $1.00 per gallon.
a. A contemplated excise tax on gasoline will cause the price of gasoline to rise to $1.40. What impact will the tax have on Sally's consumption of gasoline?
b. Since the purpose of the tax is only to discourage gasoline consumption, Congress is considering a $200 income tax rebate to lessen the burden of the gasoline tax. What impact will the rebates have on Sally's consumption of gasoline?
c. Assume that both the tax and rebate are implemented. Will Sally be worse off or better off?

---

Definitions:

Iconic Memory

A type of visual sensory memory that retains information for a very brief period, often described as the afterimage left by a visual stimulus.

Primacy Effect

A cognitive bias that results in the enhanced recall of items or information presented at the beginning of a list or sequence.

Recency Effect

The tendency to remember the most recently presented information best when recalling a list of items.

Short-term Memory

A type of memory that holds a small amount of information in an active, readily available state for a short period of time.