Question

0.2 (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) $3.2 $3.0 $2.8 $2.6 $2.4 $2.2 Demand for gasoline (per week) Quantity demanded: by a Quantity demanded: by a public bus (gallons) private car (gallons) 75 25 80 40 85 55 90 70 95 85 100 100 (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." (0) For the student claim, which part of the statement is positive? Which part of the statement is normative? (ü) Will demand for gasoline be more and more inelastic in long run? Explain. (i) Draw a graph to show how the elasticity of demand for gasoline changes over time. Page 6 of 8

Answer 1

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Question:

Answer:

a). Answer:

Mid-point method for elasticity: Its measure average percentage change in both quantity and price.

Percent change in quantity= [Q2−Q1/(Q2+Q1)÷2] * 100

Percent change in price= [P2−P1/(P2+P1)÷2]*100

Price Elasticity of Demand=percent change in quantity/percent change in price.

Mid-point method for elasticity for public bus:

Percent change in quantity= [90-95/(90 + 95)/2] * 100

= [-5/(185)/2] * 100

= (-5/92.5) * 100

= -0.0540 * 100 = -5.40

Percent change in price= [2.6−2.4/(2.6+2.4)÷2]*100

= (0.2/2.5) *100 = 0.08*100 = 8

Price Elasticity of Demand= -5.40/8 = -0.67

Inelastic demand: Demand whose percentage change is less than a percentage change in price.

So, Price Elasticity of Demand is inelastic.

b). Answer:

Demand for gasoline by a public bus is less elastic than the demand for gasoline by a private car because the quantity demand for gasoline by a public bus is less fluctuate by change in price than a private car. Example: when price change from $3.2 ti $3 then the demand for gasoline by a public bus is change by 5 gallons and the demand for gasoline by a private car is change by 15 gallons.

c). Answer:

(i). Answer:

Positive economics based of fact and figure and normative economics focuses on the value of economic fairness (should be or not).

Here, for the student claim "our demand for gasoline will get more and more inelastic in the long run" is positive and "the government should try to control gasoline price" is narrative .

(ii). Answer:

Inelastic demand refers to percentage change in quantity demand is less than a percentage change in price. It means in long run the  percentage change in quantity demand is very less than a percentage change in price.

(iii). Answer:

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