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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 6, Problem 6TY
Textbook Problem
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If the price elasticity of demand for gasoline is 0.3 and the current price is $3.20 per gallon, what rise in the price of gasoline will reduce its consumption by 10 percent?

To determine

The increase in price when consumption is reduced by 10%, given the elasticity of demand.

Explanation of Solution

Given,

Price elasticity of demand = 0.3

P1 = $3.20

Percentage change in consumption (quantity demand) = 10%.

According to the midpoint method, the formula of price elasticity of demand EP is the ratio of percentage change in quantity demand to the percentage change in price that is,

   EP=%ΔQ%ΔP%Δp=p2p1 p 2 + p 1 2×100=2( p 2 p 1 )p2+p1×100

By putting the value of percentage change in price %Δp in elasticity formula,

   EP=%ΔQ%ΔP0

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