Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the...

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Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the...

Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the consumption of gasoline and a 30% drop in the sales of SUVs. What can you say about elasticities?

business economics

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Answer 1

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the elasticity of demand =%change in quantity /%change in price

=-5/20

=-0.25

=0.25 (absolute value)

the elasticity of demand for gasoline is 0.25 and it is inelastic as the elasticity is below 1.

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cross-price elasticity=%change in quantity of a good /%change in the price of the good

=-30/20

=-1.5

The cross-price elasticity is negative so Gasoline and SUVs are complements

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Answer 2

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Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the...

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