Demand curve is much more inelastic

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Q1. Studies have fixed the short-run price elasticity for gasoline at the pump at -.20. Suppose that international hostilities lead to a sudden cutoff of crude oil supplies. As a result U.S. supplies of refined gasoline drop and, in equilibrium, the quantity demanded decreases by 40 percent. If gasoline was selling for $3.00 per gallon before the cutoff, what new price would you expect to see in the coming months?

Q2. If the demand curve is much more inelastic than the supply curve, clarify whether buyers or sellers will shoulder more of the tax burden from a new tax placed on the sellers?

Reference no: EM136786

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