Suppose that 200 gallons of gasoline are demanded at a particular price. If the price drops by 1 percent, the quantity demanded of gasoline increases to 200.5 gallon. which of the following statement is true?
a) The elasticity of demand is equal to 0.5
b) Demand is elastic
c) Demand is enelastic
d)Demand is unit-elastic.
e)Demand is perfectly inelastic.
Assistance needed
Gas consumption went up by .5 units or .25%. We say a good is inelastic if the elasticity is less than 1.00 (absolute value). Greater than 1 is elastic, equal to 1 is unit-elastic, Since 0.25%/1.00% is less than one, go with inelastic.
To determine the answer, we need to calculate the price elasticity of demand (PED). The formula for PED is:
PED = (% change in quantity demanded) / (% change in price)
We are given that the quantity demanded increased by 0.5 gallon, which is a percentage change of:
(% change in quantity demanded) = (0.5 gallon / 200 gallon) * 100% = 0.25%
We are also told that the price dropped by 1%, which is the percentage change in price:
(% change in price) = -1%
Now we can calculate the PED:
PED = (0.25% / -1%) ≈ -0.25
Since PED is negative, we know that demand is inversely related to price. However, the magnitudes of PED also matter in determining the elasticity of demand.
Now, let's analyze the magnitudes:
- If |PED| > 1, demand is elastic
- If |PED| < 1, demand is inelastic
- If |PED| = 1, demand is unit-elastic
In this case, |PED| = 0.25, which is less than 1. Therefore, the correct answer is:
c) Demand is inelastic
Note: The given options include "enelastic," which appears to be a typo. The correct term is "inelastic" as mentioned above.