Question

Macroeconomics

Posted 3 months ago

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Gas prices rose by $12 \%$ following a hurricane in the Gulf of Mexico. As a result, the amount of gas purchased in the week fell by $3 \%$ following the price increase.
What is the price elasticity of demand for gas in the week following the price increase?
Choose 1 answer:
(A) 2.5
(B) 0.25
(C) 4
(D) 0.5
(E) -0.75
```

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Answer from Sia

Posted 3 months ago

Solution

a

Price Elasticity of Demand Formula: The price elasticity of demand (PED) is calculated using the formula $PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

b

Applying the Formula: Given that the gas prices rose by $12\%$ and the quantity demanded fell by $3\%$, we use the formula to calculate PED as $PED = \frac{-3\%}{12\%}$

c

Calculation: Simplifying the expression from step b, we get $PED = \frac{-3}{12} = -0.25$

Answer

(B) 0.25

Key Concept

Price Elasticity of Demand

Explanation

The price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good, with a negative sign indicating the inverse relationship between price and quantity demanded.

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