Question

The government of a country imports gasoline at a price of $3 per gallon and makes it available to its citizens at a price of $2 per gallon. The demand curve for gasoline in the country is shown below. What could be the potential impact on consumer behavior and the market if the government decides to increase the selling price to $3 per gallon to match the import cost?

A) Increase in consumer demand
B) Decrease in consumer demand
C) No change in consumer behavior
D) Shift in the demand curve

Answer 1

Increasing the selling price of gasoline from $2 to $3 per gallon will likely result in a decrease in consumer demand according to the law of demand reflected in the demand curve.

Step-by-step explanation:

If the government of a country increases the selling price of gasoline from $2 per gallon to $3 per gallon to match the import cost, this would lead to a decrease in consumer demand. According to the demand curve, as the price of a good increases, the quantity demanded of that good typically decreases. This is because consumers will seek alternatives or decide to use less of the product due to the higher cost.

For instance, when the price of a gallon of gasoline rises from $1.40 to $1.80, above the equilibrium price, the quantity demanded drops, reflecting a decrease in consumer purchase behavior. Similarly, if the government raises the price to $3, we can expect the quantity demanded to decrease. This impact is a fundamental principle of the law of demand that is observed in the market.