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Question
Macroeconomics
Posted 3 months ago

Gas prices rose by 12%12 \% following a hurricane in the Gulf of Mexico. As a result, the amount of gas purchased in the week fell by 3%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=% change in quantity demanded% change in pricePED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}
b
Applying the Formula: Given that the gas prices rose by 12%12\% and the quantity demanded fell by 3%3\%, we use the formula to calculate PED as PED=3%12%PED = \frac{-3\%}{12\%}
c
Calculation: Simplifying the expression from step b, we get PED=312=0.25PED = \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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