Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15 million gallons a day were sold. In October 2004, the price averaged $2.15 a gallon and 14 million gallons were sold
If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate whether demand was elastic or inelastic.
Price elasticity of demand = [(14 - 15 ) / (15 + 14 )/2 ] / [(2.15 - 1.35 ) / (1.35 + 2.15 )/2] = (-1 / 14.5 ) / (0.80 / 1.75 ) = (-0.069 / 0.457 ) = -0.15.
Price elasticity of demand equals 0.15 (in absolute value) indicating that demand was inelastic.
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