Question

Suppose that when the price of gasoline is $3 per gallon, the total amount of gasoline purchased in the United States is 8 million barrels per day. Also, suppose that when the price of gas decreases to $2.25 per gallon, the total amount of gasoline purchased is 12 million barrels per day. Based on these numbers and using the simple formula, the price elasticity of demand for gasoline is:
a. 4
b. 0.25.
c. 2.
d. -0.5.

Answer 1

Answer:

Option (C) is correct.

Explanation:

Elasticity of demand refers to the responsiveness of change in quantity demanded with any change in the price level.

Elasticity of demand:

= (change in quantity ÷ old quantity) ÷ (change in price ÷ old price)

=[(12 - 8) ÷ 8] ÷ [($3 - $2.25) ÷ $3]

= 0.5 ÷ 0.25

= 2

Therefore, the price elasticity of demand is 2.