Suppose the price of gasoline in July 2017 averaged $2.35 a gallon and 15 million gallons a day were sold. In October 2017, the price averaged $3.05 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.
What will be an ideal response?
Price elasticity of demand = [(14 - 15 ) / (15 + 14)/2 ] / [(3.05 - 2.35 ) / (2.35 + 3.05)/2] = (-1 / 14.5 ) / (0.70 / 2.70 ) = (-0.069 / 0.259 ) = -0.27.
Price elasticity of demand equals 0.27 (in absolute value) indicating that demand was inelastic.
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