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 crude oil (from which gasoline is made) to increase, how will that affect total revenue from gasoline in the short run, all other things unchanged

Answer 1

Total revenue would rise in the short run

Step-by-step explanation:

A price elascitiy of 0.4 indicates that demand is inelastic.

Inelastic demand means that a small change in price has little or no effect on quantity demanded. The absolute value of inelastic demand is less than 1.

If the cost of the crude oil increases, the price of gasoline would increase too. Because demand is price inelastic , there would be little or no change in the quantity demanded of gasoline as a result total revenue would increase as a result of the rise in price.

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