Chapter 5, Problem 2.8P

Studies have fixed the short-run price elasticity of demand for gasoline at the pump at –0.20. Suppose that international hostilities lead to a sudden cutoff of crude oil supplies. As a result, U.S. supplies of refined gasoline drop 10 percent.

1. a. If gasoline were selling for $2.30 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?
2. b. Suppose that the government imposes a price ceiling on gas at $2.30 per gallon. How would the relationship between consumers and gas station owners change?