Question

Q.2 (15 points) The following table shows the demand for gasoline by a public bus and the demand for gasoline by a private car. Price (per gallon) Demand for gasoline (per week) Quantity demanded by a Quantity demanded by a private public bus (gallons) car (gallons) S3.2 75 25 $3.0 80 40 $2.8 85 55 $2.6 90 70 95 85 $2.2 100 100 (a) Suppose the price of gasoline increases from $2.4 to $2.6. Calculate the price elasticity of demand by a public bus using mid-point method. Is the demand elastic? Explain. (b) Without calculations, explain why the demand for gasoline by a public bus is less elastic than the demand for gasoline by a private car. (c) A student claimed that, “Our demand for gasoline will get more and more inelastic in the long run. The government should try to control gasoline price.” (1) For the student claim, which part of the statement is positive? Which part of the statement is normative? (ii) Will demand for gasoline be more and more inelastic in long run? Explain. (iii) Draw a graph to show how the elasticity of demand for gasoline changes over time.

Answer 1

Answer 2.

a. Price elasticity of demand=((85-70)/(85+70)/2)÷(2.4-2.6)/(2.4+2.6)/2)= - 2.4

Yes the demand is Elastic. Since the absolute value of elasticity is greater than 1, the demand is elastic.

b. The private car has many substitutes for gasoline but public bus has very few alternatives for gasoline and it meets the demand for high number of people. So the demand for gasoline by public bus is less elastic than demand foe gasoline by private car.

c.

i. Positive statement= our demand for gasoline will be more and more inelastic in the long run

Normative statement= The government should try to control gasoline prices

reason- Normative statements are opinion based and positive statements are factual.

ii. No, in the long run there will be more alternatives for gasoline . So the demand for gasoline will be more elastic in the long run.

iii. Gasoline will be relatively inelastic in short run and relatively Elastic in the long run.

Price Long run Short run. Quantity Of gasoline