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?

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Definitions:

Appropriate Death

A person dying as he or she wished to die. The death is generally consistent with past personality patterns.

Anorexia

An eating disorder characterized by an intense fear of gaining weight, leading to severe food restriction and weight loss, often associated with a distorted body image.

Cancer

A disease characterized by the uncontrolled division of abnormal cells in a part of the body, potentially leading to tumors, spread to other areas, and various health challenges.

Lack

The state of being without or not having enough of something.