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Two drivers, Walt and Jessie, each drive up to a gas station

Economics

Two drivers, Walt and Jessie, each drive up to a gas station. Before looking at the price, each places an order. Walt says, 'I'd like 10 gallons of gas.' Jessie says, 'I'd like $10 worth of gas.'

What is each driver's price elasticity of demand?

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By just looking at the given information, Walt orders the exact amount of gas without wondering (or caring) about what the price is.

It means that he needs these 10 gallons of gas regardless of the price (maybe he is a driver who needs to drive a car for work; or maybe he is headed on a pre-booked trip and has no choice; maybe he has very high income and does not care about gasoline prices much; or there could be another reason).

Therefore, Walt's demand for gasoline is PERFECTLY PRICE INELASTIC (price elasticity of demand is equal to ∞∞).

Perfect inelasticity is a situation when quantity demanded doesn't change (stays the same), when the price changes. It means that even if the price goes up, Walt would still buy the same amount of gas as before.

 

Contrary to Walt, Jessie seems to care about the gasoline price and he exactly ties his gas order in to the price.

Therefore, Jessie's demand for gas is UNIT PRICE ELASTIC (price elasticity of demand is equal to 1), meaning that a percentage change in quantity demanded is equal to a percentage change in price.

He has $10 to spend on gas and he needs as much gas as these $10 can buy, therefore, if, say gasoline price goes up by 5%, to stay within his budget, he would buy 5% less of gas (quantity demanded would go down by 5% in response to a 5% price rise).

Similarly, if gasoline price goes down by 5%, he would buy 5% more of gas (quantity demanded would go up by 5% in response to a 5% price decrease).