Question

November 2018

price per gallon: $2.79

gallons sold: 12,500

November 2019

price per gallon: $2.24

gallons sold: 14,250

A. Explain how you would calculate the price of elasticity if demand of gasoline.

B. Explain how consumer and producer surplus will change as a result of this price change.

C. Explain the elasticity of supply for gasoline. (If prices go up, how quickly would the supply of gasoline increase)

D. Discuss whether you feel the demand for gasoline is elastic, inelastic, perfectly elastic, or unit elastic.

Answer 1

A) B applying the formula = % change in quantity demnded / % change in price

= Take 2018 demand as QD=12,500

Price as P=$2.79

Take 2019 demand as QD1=14,250 and Price as P1= $2.24

Price elasticity of demand= % change in quantity demnded / % change in price

Ped- =Q1-Q/ Q * P / P1-P

Ped-= 14,250- 12,500/ 12,500 * 2.79/ 2.24- 2.79

Ped-= 1750/ 12500 * 2.79 / -.55

Ped-=0.14 * -5.07

Ped-=.-70

Ped= .70

B) In this consumer surlpus will increase due to decrease in price and producer surplus will decrease due to decrease in price.

D) Demand for gasoline is realtive inelastic . It means that change in price is more than change in demand. As Ped is .70 reveal that price elasticity of demand is relative inelastic.