Question

Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -0.20. Suppose that international hostilities lead to a sudden cutoff of crude oil supplies. As a result, U.S. supplies of refined gasoline drop and the quantity demanded decreases by 20 percent.

If gasoline were selling for $2.50 per gallon before the cutoff, what new price would you expect to see in the coming? (hint" Use the absolute value of the gasoline elasticity coefficient and treat all values as positive)

What will be the price of gasoline per gallon?

Answer 1

$1.5

Step-by-step explanation:

Elasticity of Demand:

A change in the price of a commodity affects its demand.

For example: The price of petrol decreased from $5/ltr to $4/ltr. As a result more people started buying petrol and the demand increases from 10k gallons to 12k gallons.

elasticity coefficient= 0.2

change in quantity demand= 20%

Gasoline selling price= $2.50

Elasticity = Change in demand / Change in price

E=Δq / Δp

0.2=20/Δp

Δp=20/0.2

Δp=100%

So the change in price is 100%

Δp=old price - new price

1=2.50 - new price

new price= 2.50 - 1

new price= $1.5