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    Sales tax

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    Congress is considering increasing the sales tax on gasoline by $.03 per gallon. Last year motorists purchased 10 million gallons of gas/month. The demand curve is such that every $.01 increase in price, producers are willing to provide 50000 more gallons of gasoline to the market. The legislature has stated that the $.03 tax will increase government revenues by $300,000/month and raise the price of gas by $.03/gallon. is this correct and show how you came to this conclusion.

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    Solution Preview

    The logic above is not correct. Firstly, the increase in gas by $.03 per gallon will definitely decrease the demand for gas. This is because of the law of demand. Thus, the government revenue ...

    Solution Summary

    The solution provides a good response to the sales tax question below.