Calculate the price elasticity of demand for gasoline

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Explain how to measure the price elasticity of demand and supply and the cross elasticity income elasticity of demand?

1. Next, consider the following scenario:

a. In June 2008, the U.S. retail gas price jumped from $3 to $4 a gallon.

b. This is a 33% increase in price from January 2008.

c. During that time, the total quantity of gasoline purchased fell by 3%.

d. Supplies of gasoline produced also decreased from 1 million barrels to 800,000 barrels.

e. No viable substitute has been created to replace gasoline.

2. In a two- to three-page paper (600 words minimum), address the following. Be sure to show all your work.

a. Explain how you would calculate the price elasticity of demand for gasoline.

b. In general terms, explain how consumer and producer surplus will change as a result of this price increase.

c. Because there is no viable substitute for gasoline at this time, what can you say about the price elasticity for gasoline?

d. Explain the elasticity of supply for gasoline. (If prices go up, how quickly would the supply of gasoline increase?) Is the demand for gasoline elastic, inelastic, perfectly elastic or inelastic, or unit elastic? Why?

Reference no: EM13740001

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