Question

Step 1 Analyze gasoline price hike statistics in the following scenario. In June 2008, the U.S. retail gas price jumped from $3 to $4 a gallon. This is a 33% increase in price from January 2008. During that time, the total quantity of gasoline purchased fell by 3%. Supplies of gasoline produced also decreased from 1 million barrels to 800,000 barrels. No viable substitute has been created to replace gasoline.

Answer 1

The price elasticity of demand is given by the formula, E = % change in quantity demanded/% change in price.

Where E is the price elasticity of demand.

Given the % change in quantity demanded = -3% where the negative sign indicates that the quantity demanded has fallen with the rise in price.

And the % change in price = 33%.

Then, E = -3%/33%

E = -0.0909

Elasticity of supply is given as, Es = % change in quantity supplied/% change in price.

% change in quantity supplied = (800,000 - 1,000,000)/1,000,000 * 100

% change in quantity supplied = -20%, that is, the supply decreased by 20%

Then, Es = -20%/33%

Es = -0.6060

Consumer surplus is the difference between the maximum willingness an individual is willing to pay for a good or services and the amount actually paid for it. Since the price rise is 33% and the demand fall is by 3%, so the change in consumer surplus would be = -3% * 33% or 99% fall in C.S

Producer surplus is the difference between the producer actually receives for the good and the minimum price willing to receive. Change in P.S is = 33% * -20% or 660%

Being no close substitute available for gasoline, the cross price elasticity of demand for gasoline would be zero. As with the change in any variable, the quantity of gasoline demand would be unaffected. Income elasticity of demand for gasoline would be positive because as the income would increase, the demand for gasoline would also go up. Similarly, the income elasticity of supply for gasoline is positive as the income increases, the producers would be willing to produce more gasoline because it would be more profitable for them to produce it.

The demand for gasoline is inelastic. This can be seen from the value of price elasticity of demand. The value is less than 1 indicating an inelastic demand.