Would you expect the consumption of gasoline to be more severely affected if these higher prices remained in effect for a year or more ? Why or why not ? Based on the law of demand define the typical relationship between the price and quantity demands. Consumer would tend to purchase more when the price is low and lesser when the price of gasoline is high. When the price of gasoline is increases consumers would find their way to adjust to the price. A factor to determine the demand elasticity is ease to find the substitution.

As for this case there is only little substitution for the gasoline in the short run. Since there is less substitution for gasoline hence it would be considered is inelastic elasticity in short run As for the long run, when the price of gasoline increase the demand of elasticity would be more elastic as the consumer can adapt the over the increase of the price for gasoline. Instead of driving the consumer can take public transport when they go to work. Consumer need some time to make the necessary changes. This could happen in long run as this involve changing of habit or lifestyle of consumer.

Q 11. Why do you think that whenever governments ( federal and state ) want to increase revenues, they usually propose an increase in taxes on cigarettes and alcohol ? Cigarettes and alcohol are both addictive goods and they are not easy to get rid off. Therefore, these are inelastic products where changes in price will not give a large impact on the quantity consumed by the consumers. Hence, the total revenue for the government will still increase even if the government increases the taxes for cigarettes and alcohol. Problems : Q7.