Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 9

As newly appointed "Energy Czar," your goal is to reduce the total demand for residential heating fuel in your state. You must choose one of three legislative proposals designed to accomplish this goal: ( a ) a tax that would effectively increase the price of residential heating fuel by $1; ( b ) a subsidy that would effectively reduce the price of natural gas by $3; or ( c ) a tax that would effectively increase the price of electricity (produced by hydroelectric facilities) by $4. To assist you in your decision, an economist in your office has estimated the demand for residential heating fuel using a linear demand specification. The regression results are presented on page 119. Based on this information, which proposal would you favor? Explain.