Question

Why the tepid response to higher gasoline prices? Most studies report that when U.S. gas prices rise by 10 percent, the quantity purchased falls by 1 to 2 percent. In September 2005, the average retail gasoline price was $2.90 a gallon, about $1.00 higher than a year before but purchases of gasoline fell by only 3.5 percent. Source: The New York Times, October 13, 200 Compare the elasticity implied by the data for the period from September 2004 to September 2005 with that implied by most studies. What might explain the difference? In the year to September 2005, the percentage change in the price of gasoline was and the price elasticity of demand was >>> Answer to 2 decimal places. The estimated price elasticity of demand for 2005 is than that found by most studies, and the difference might be explained by O A. higher; the development of clean fuels that are close substitutes for gasoline. O B. smaller, a change in preferences toward clean energy decreasing the demand for gasoline. O C. higher; improvements in public transportation decreasing the demand for gasoline. OD. smaller, higher incomes increasing the demand for gasoline.

Answer 1

Price elasticity of demand measures the change in quantity demanded in response to changes in price. It is given by the formula Ev = % change in quanting + M лице Pric where, &d is the price elasticity demand. According to most studies, if gas prices, rise by 10 percent, the quantity purchased falls by a to 2 percent let us assume that the quantity purchased would fall by 1.5 percent. (midpoint of 1 and 2). • Here, Ed will be assume that the quaning and me O N Edo S 10 -.0:15 <1854 I sime, Ed (= 015) < 1, the demand for gas is said to be inelastic..

Now, let us consider the time period between 2016 September 2004 and 2005. Here, we have % change in quantity : 3.5% · The average retail gasoline price was $2.90 a gallon , about $1 higher than a year before lie, than in september 2004), ... : di Price of gas in 2004 was : $. (2.90-1) ist = $1.907. " os Percentage change in price is 9.90-1.90 1: 1.90 100 eo Ed in between 2004 and 2005 is Edi_3.5. 52.632 0.0661 o Price elasticity of gas inplied by the data for from September 2006 to September 2005 is 0.0661 O Thus, we have, In the year to September 2005; the percentage change in the price of gasoline was 52.63% and the prieel elasticity of demand was 0.06 SIGM A (or. 0-07)

Неий, . Price elasticity suggested by most studies is 0.15 I greater than that estimated from data, ie Or 6). The estimated price elasticity of demand for 2005 is - smaller than that found by most studies, and the differeme might be explained by a change in preferences toward clean energy decreasing the demand for gasoline. Thiss B. is the correct answer.