There’s a gas shortage in Gasland. You’re presented with two proposals that will

Question

There’s a gas shortage in Gasland. You’re presented with two proposals that will achieve the same level of reduction in the use of gas. Proposal A would force everybody to reduce their gas consumption by 14 percent (regulatory policy). Proposal B would impose a tax of 80 cents on the consumption of a gallon of gas, which would also achieve a reduction of 14 percent. Consumers of gas can be divided into two groups—one group whose demand is elastic and another group whose demand is inelastic.

a. How will the proposals affect each group?

b. Which group would support a regulatory policy?

c. Which would support a tax policy?

a.With both proposals, the quantity of oil demanded will decline for each group, causing a movement down along each demand curve. b.Proposal A would result in less oil demanded (demand curve shifts). Proposal B would result in a lower quantity of oil demanded (movement along the demand curve). c.Proposal A would result in a lower quantity of oil demanded (movement along the demand curve). Proposal B would result in less oil demanded (demand curve shifts). d.With both proposals, each group will demand less oil. Their demand curves will shift down.

Explanation / Answer

Ans a

b.Proposal A would result in less oil demanded (demand curve shifts). Proposal B would result in a lower quantity of oil demanded (movement along the demand curve).

Because due to proposal A , demand will decrease due to factors other than price so demand curve will shift. Due to proposal B , demand will decrease due to change in price due to imposition of tax, so there will be movement along demand curve

Ans b

A) group with elastic demand

Ans c)

B) the group with inelastic policy

b.Proposal A would result in less oil demanded (demand curve shifts). Proposal B would result in a lower quantity of oil demanded (movement along the demand curve).

Because due to proposal A , demand will decrease due to factors other than price so demand curve will shift. Due to proposal B , demand will decrease due to change in price due to imposition of tax, so there will be movement along demand curve

Ans b

A) group with elastic demand

Ans c)

B) the group with inelastic policy

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