Suppose the short-run price elasticity of demand for gasoline is 0.4.Acting on this information,one gasoline station at an intersection where there are three additional gasoline stations raises its price by 10 percent.If the other three stations keep their original prices,the first gasoline station will probably see its gasoline sales
A) increase by 0.4 percent.
B) remain unchanged.
C) fall by 0.4 percent.
D) fall by 4 percent.
E) fall by more than 4 percent.

Question

Quizplus · Accepted Answer

Given the price elasticity of demand for gasoline is 0.4, a 10 percent price increase would typically lead to a 4 percent decrease in quantity demanded (0.4 * 10%). However, because there are three other gasoline stations at the intersection not raising their prices, the first station is likely to lose more than the calculated 4 percent of its sales to its competitors, hence the correct answer is that sales will fall by more than 4 percent.

Suppose the Short-Run Price Elasticity of Demand for Gasoline Is