Question

Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the consumption of gasoline and a 30% drop in the sales of SUVs. What can you say about elasticities?

In your response:

    a) Be sure to discuss both goods - gasoline and SUVs

    b) identify the "type" of elasticity

    c) calculate the elasticity of both goods

    d) whether the good is elastic, or inelastic

    e) For SUVs, discuss what kind of good this is in terms of elasticity

Answer 1

Price elasticity of demand (PED)= % change in quantity demanded /% change in price of the good.

PED for gasoline

% change in quantity demanded=-5%

% change in price of the good = 20%

PED= -5%/20%=-0.25.

PED is 0.25 as it is an absolute value and since PED <1, it is inelastic.

PED is inelastic when a change in price causes a smaller percentage change in demand.

PED for SUV

% change in quantity demanded=-30%

% change in price of the good = 20%

PED= -30%/20%=-1.5

PED is 1.55 as it is an absolute value and since PED >1, it is elastic. PED is elastic when a change in price causes a larger percentage change in demand.