Six months ago, the price of gasoline was $2.20 per gallon. Now, the price is $2.40 per gallon. In response to this price increase, the number of gallons of gasoline purchased has declined by 2 percent. Based on this information, what is the absolute price elasticity of demand for gasoline?

Question

Quizplus · Accepted Answer

Absolute price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. From the given information, we can calculate the percentage change in price as follows:

Percentage change in price = (New price - Old price) / Old price x 100
= (2.40 - 2.20) / 2.20 x 100
= 9.09%

We know that in response to this price increase, the number of gallons of gasoline purchased has declined by 2 percent. Therefore, the percentage change in quantity demanded is:

Percentage change in quantity demanded = -2%

Using the formula for absolute price elasticity of demand, we get:

Absolute price elasticity of demand = Percentage change in quantity demanded / Percentage change in price
= -2% / 9.09%
= -0.22

However, the absolute value of the elasticity is usually reported, which gives us:

Absolute price elasticity of demand = 0.22 ≈ 0.23

Therefore, the best choice is C.

Six Months Ago, the Price of Gasoline Was $2