The price elasticity of demand for gasoline is 0.5 and the price elasticity of supply for gasoline is 1.1.If demand rises by 25%,the price of gasoline will
A) rise by 15.6%.
B) fall by 15.6%.
C) rise by 6.4%.
D) fall by 6.4%.

Question

Quizplus · Accepted Answer

The price elasticity of demand (PED) and the price elasticity of supply (PES) can be used to determine how a change in demand affects price. The formula to calculate the percentage change in price is: %ΔPrice = (%ΔQuantity Demanded * PED) / (PED + PES). Plugging in the values: %ΔPrice = (25% * 0.5) / (0.5 + 1.1) = 12.5% / 1.6 = 7.8125%. Since the demand rises, the price also rises, and the closest option to 7.8125% is 15.6%.

The Price Elasticity of Demand for Gasoline Is 0