Suppose that the long-run price elasticity of demand for gasoline is 20.55. Assume that the price of gasoline is currently $3.00 per gallon, the equilibrium quantity of gasoline is 140 billion gallons per year, and the federal government decides to increase the excise tax on gasoline by $1.00 per gallon. Suppose that in the long run, the price of gasoline increases by $0.70 per gallon after the $1.00 excise tax is imposed.

a. What is the new quantity of gasoline demanded after the tax is imposed? How effective would a gas tax be in reducing consumption of gasoline in the long run?

b. How much does the federal government receive from the tax?

c. Compare your answers to those in Solved Problem 6.5 on page 201.