Question

#1. Economists have calculated that a demand elasticity of gasoline of 0.06 percent in 2005. Has the demand elasticity of gasoline changed in the last 13 years? Please take into account the following when answering this question.

a) consumers react differently to temporary price spikes to permanent price spikes.

b) car companies discount big cars when gasoline prices increase.

c) the household budget devoted to gasoline falls as income increases.

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#2. Fuel efficiency standards and gasoline taxes are not mutually exclusive. How does this statement change your answer to question #1?

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in extended paragraphs please

Answer 1

The demand elasticity of gasoline has not changed much in the last 13 years because :

1. Most price spikes are temporary in nature, and gasoline being an essential commodity, its demand remains unchanged in case of such hikes.

2. When gasoline prices increase, car companies discount big cars. So as a result, since consumers save on their expenditure on cars, they do not reduce their consumption of gasoline and thus, the demand for gasoline remains inelastic.

3. When a houselhold's income increases, it does not necessarily increase its consumption of gasoline since it is required only in fixed amounts, hence the demand elasticity of gasoline remains unchanged in this case too.