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1. a) Assume the long run elasticity of demand for gasoline is -0.3 and start with the current average San Diego price of $4.50 per gallon. What would we need the gasoline price to be in order to cut gasoline use in half in the long run? How about if we want to reduce gasoline use by 80%?
b) Suppose the income elasticity of demand for gasoline is 0.5, the current tax in California is $1.50 per gallon, and that households making $45,000 per year consume 300 gallons per year. How much tax does a household making $45,000 per year pay? What fraction of their income do they spend on the gas tax? How much tax does a household with an income of $90,000 pay? What fraction of their income do they spend on the gas tax?
c) True or false: Subsidizing electric cars has a progressive impact on households. Explain your answer in a sentence or two, and use the income elasticity of demand for electric cars in your explanation.
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