Review of elasticity Suppose that when the price of gasoline

Review of elasticity. Suppose that when the price of gasoline changes from $2 to $1.50, the quantity demanded of gasoline decreases in Manhattan from 800 gallons per day to 960 gallons. Compute the price elasticity of demand using the midpoint formula. Show your work to get full credit. The gasoline elastic or inelastic?

Solution

Midpoint formula for elasticity

Ed = (Change in Q/Change in Price)((P1+P2)/(Q1+Q2))

=-(-160/0.5)*((2+1.5)/(800+960))

=0.637

P1 = Price before fall ($2.00)

P2 = Price after fall ($1.50)

Q1 = Quantity demanded before fall in price (800 gallons)

Q2 = Quantity demanded after fall in price (960 gallons)