Question

The price elasticity of demand for gasoline in the short run has been estimated to be 0.4. If a war in the Middle East causes the price of oil (from which gasoline is made) to increase, how will that affect total revenue from gasoline in the short run, all other things unchanged?

a. Quantity demanded will decrease; total revenue will rise.
b. demanded will not change; total revenue will rise.
c. Quantity demanded will stay the same; total revenue will fall.
d. Total revenue will remain unchanged.

Answer 1

The answer is: A) Quantity demanded will decrease; total revenue will rise.

Step-by-step explanation:

Gasoline has an inelastic demand (price elasticity of demand ≤ 1). It means that if the price of gasoline increases 10%, consumers will only decrease the amount of gasoline they buy by 4%. So even if the quantity demanded of gasoline decreases a little, the total revenue will increase.