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Suppose the price of gasoline in July 2018 average $1
Suppose the price of gasoline in July 2018 average $1.35 a gallon and 15 million gallons a day were sold. In October 2018, the price average $2.15 a gallon and 14 million gallons were sold. If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate shearer demand was elastic or inelastic.
Expert Solution
Computation of Price Elasticity of Demand:
Price Elasticity of Demand (Ed ) = ( Q 2 - Q 1)/ (Q 2 + Q 1 )/2/ (P 2 - P 1)/(P 2 + P 1)/2
Here,
Price of gasoline $1.35 ; $2.15
Quantity Demanded 15 million ; 14 million
Elasticity of demand (Ed ) = (14-15)/(14+15)/2/(2.15-1.35)/(2.15+1.35)/2
= (-1/14.50) / (0.80/1.75)
= -0.0690/0.4571
Elasticity of demand (Ed ) = -0.1509 or 0.15
Demand was inelastic because change in price brings a smaller change in the quantity demanded of gasoline.
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