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?

Question

Business

Randy Raymond

3 July, 08:18

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?

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Answers (1)

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Savanah Dougherty · 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.