Question

In July 2008, the average price of gasoline in the United States was $4.09 per gallon and consumers bought 6 percent less gasoline than they had during July 2007, when the average price was $2.96 per gallon. Based on these numbers, what was the price elasticity of demand for gasoline from July 2007 to July 2008?

Answer 1

PED= 0.1571

Explanation:

The price elasticity of demand (PED) indicates how the quantity demanded change when the price changes. Is defined by this equation:

Price Elasticity of Demand = Percentage change in Q/ Percentage change in P

In this case, the problem is giving percentage changes in Q but we must calculate the percentage change in price:

%Change in price = ( p2-p1/p1)*100= ($4.09-$2.96)/$2.96= 0.3817*100=38.17%

%Change in quantity is= -6%

PED= -6%/38.17%

In absolute value:

PED= 0.1571

If the PED is less than 1 then gasoline is considered as inelastic.