Suppose that the average household in a state consumes 800 gallons of gasoline per year.
A 20-cent gasoline tax is introduced, coupled with a $160 annual tax rebate per household.
Will the household be better or worse off under the new program?

If the household does not change its consumption of gasoline, it will be unaffected by the tax-rebate program, because in this case the household pays 0.20*800=$160 in taxes and receives $160 as an annual tax rebate. The two effects would cancel each other out. To the extent that the household reduces its gas consumption through substitution, it must be better off. The new budget line (price change plus rebate) will pass through the old consumption point of 800 gallons of gasoline, and any now affordable bundle that contains less gasoline must be on a higher indifference curve. The household will not choose any bundle with more gasoline because these bundles are all inside the old budget line, and hence are inferior to the bundle with 800 gallons of gas.

1. Which of the following three groups is likely to have the most, and which the least, price-elastic demand for membership in the Association of Business Economists?

a. students The major difference among the groups is the level of income. We know that if the consumption of a good constitutes a large percentage of an individual’s income, then the demand for the good will be relatively elastic. If we assume that a membership in the Association of Business Economists is likely to be a large expenditure for students, we may conclude that the demand will be relatively elastic for this group.

b. junior executives The level of income for junior executives will be larger than that of students, but smaller than that of senior executives. Therefore, the demand for a membership for this group will be less elastic than