You are a staunch environmentalist. When hybrid vehicles were introduced, the supply was very limited. Buyers were paying a premium over the listed manufacturer's suggested retail price (MSRP). At that time, your budget could not stretch that far, but you still wanted to own a car that does not depend on petroleum products. By waiting, you find that the automobile dealers have announced that their shipments of new hybrid cars have increased by 10 percent. Meanwhile, the average price of regular gasoline rose from $3.30 to $3.63 per gallon.
Required:
If the price elasticity of demand for new hybrid cars is 1.25 and for gasoline is 1.0, what was the effect on the prices of a new hybrid car and on gasoline?
A) The price of the hybrid car fell by 2.5 percent and the price of gasoline increased by 1.1 percent.
B) The price of the hybrid car rose by 12.5 percent and the price of gasoline increased by 11.1 percent.
C) The price of the hybrid car fell by 10 percent as did the price of gasoline.
D) The price of the hybrid car rose by 8 percent, and the price of gasoline increased by 10 percent.
E) The price of the hybrid car fell by 8 percent, and the price of gasoline increased by 10 percent.

Question

You are a staunch environmentalist. When hybrid vehicles were introduced, the supply was very limited. Buyers were paying a premium over the listed manufacturer's suggested retail price (MSRP). At that time, your budget could not stretch that far, but you still wanted to own a car that does not depend on petroleum products. By waiting, you find that the automobile dealers have announced that their shipments of new hybrid cars have increased by 10 percent. Meanwhile, the average price of regular gasoline rose from $3.30 to $3.63 per gallon. ​
​Required:
If the price elasticity of demand for new hybrid cars is 1.25 and for gasoline is 1.0, what was the effect on the prices of a new hybrid car and on gasoline?
A) ​The price of the hybrid car fell by 2.5 percent and the price of gasoline increased by 1.1 percent.
B) ​The price of the hybrid car rose by 12.5 percent and the price of gasoline increased by 11.1 percent.
C) ​The price of the hybrid car fell by 10 percent as did the price of gasoline.
D) ​The price of the hybrid car rose by 8 percent, and the price of gasoline increased by 10 percent.
E) ​The price of the hybrid car fell by 8 percent, and the price of gasoline increased by 10 percent.

Quizplus · Accepted Answer

The price elasticity of demand for new hybrid cars is 1.25, which means that a 1% increase in the price of a new hybrid car will lead to a 1.25% decrease in the quantity demanded. The price elasticity of demand for gasoline is 1.0, which means that a 1% increase in the price of gasoline will lead to a 1% decrease in the quantity demanded.The supply of new hybrid cars has increased by 10%, which will lead to a decrease in the price of new hybrid cars. The average price of regular gasoline has increased from $3.30 to $3.63 per gallon, which will lead to an increase in the price of gasoline.The price of the hybrid car fell by 8 percent, and the price of gasoline increased by 10 percent.

You Are a Staunch Environmentalist