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Discussing Economics

Need a understanding with this assignment in Economics. Need a explanation on each statement true or false and why.

1. Governments have sometimes forgotten about elasticity when they formulate tax policy. A few years ago the city fathers in Washington DC wanted to increase revenues so they increased the gas tax by ten cents a gallon. Revenues from gasoline taxes decreased instead of increasing. The tax increase also managed to put several service stations out of business. Why?

2. Using the total revenue test for elasticity, when there is a direct relationship between price and total revenue the demand is elastic.

3. Economic activity is not a zero sum game. When trade takes place in a market without force or fraud both parties can win.

4. Profit and loss determines how the factors of production are allocated?

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Solution Preview

1. They wanted to increase revenues, so they increased gas prices by .10 per gallon. Revenues from gasoline had the opposite effect and decreased because of the price elasticity of gasoline. Most people believe that gasoline is an inelastic good and that changes in price don't affect changes in demand to the same degree as the change in price. This thinking is erroneous - gasoline is not inelastic, it is elastic, which means that changes in price will affect demand, particularly in the short run. Due to the increase in gasoline, people found more convenient, cheaper ways of traveling. When gas prices rise, even by a small amount, many consumers find ways to burn less gas. They take the bus a few days a week, they walk to places they drove to before, and when they make their next car purchase, they look at more fuel efficient cars. This causes a decrease in demand due to a price change - even though it is a small price change in the price of gasoline. It is not surprising that the tax put gas stations out of business. When we have a heavily populated city and this takes place, the demand is going to decrease very abruptly, and it will send ...

Solution Summary

This solution clarifies if each economics statement presented is true or false. A detailed explanation is given for each statement indicating why it is true or false.