Question

Gas prices have fallen dramatically in recent days. A recent study found that the elasticity of demand for gasoline is -.67. If the price of gasoline has fallen by 15%, using the total revenue test, calculate exactly how much revenues have increased or decreased.

Answer 1

The price elasticity of demand is here negative so that means that as the price of gasoline decrease , the demand would have increased and vice versa.

So here

Elasticity of demand=

(%change in demand/%change in price)/100

So, .67= (%change in demand/15)

So, percent change in demand= (.67*15)

=10.5%

So the revenue would have increased by 10.5% given that price elasticity is negative and any decline in price would have led to sharp rise in demand.