Why the tepid response to higher gasoline prices?
Most studies report that when US. gas prices rise by 10 percent, the quantity purchased falls by 1 to 2 percent. In September 2005, the retail gasoline price was $2.90 a gallon, about $1.00 higher than in September 2004, but purchases of gasoline fell by only 35 percent. Source: The New York limes, October 13, 2005
1. Calculate the price elasticity of demand for gasoline implied by what most studies have found.
2. 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?
Considering the elasticity is greater than 1 this means that this good is very elastic, so elastic that it is not as heavily affected by price as other good due to the degree of necessity.
3. When heavy rain ruined the banana crop in Central America, the price of bananas rose from $1 a pound to $2 a pound. Banana growers sold fewer bananas, but their total revenue remained unchanged. By how much did the quantity of bananas demanded change? Is the demand for bananas from Central America elastic, unit elastic, or inelastic?
The quantity demanded must have dropped by half. To incur the same amount of revenue when you increase a price you would need to sell half as much if you double your price. This shows that this good is less elastic because some people will still buy certain products even if the price doubles. As in people will still buy it but less people will buy this good. If it jumped from 2 to 4 dollars. I could see another maintaining of the revenue however, there sales would decrease by half again, and essentially be ¼ of the original price. 4. The income elasticity of demand for haircuts is 1,5, and the income elasticity of demand for food is 0.14. You take a weekend job, and the income you have to spend on food and haircuts doubles. If the prices of food and haircuts remain the same, will you...
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