Most studies find that in th… Show more Based on the infor

Homework Assistance Economics Most studies find that in th… Show more Based on the infor

Economics

Most studies find that in th… Show more Based on the infor

Most studies find that in th… Show more Based on the information provided, answer the following questions. “ Most studies find that in the short run, say over a year, a 10% increase in gas prices is associated with 1% to 2% drop in the quantity of gasoline purchased … From September 2004 to September 2005, the average retail gasoline price jumped to $2.9 per gallon from $1.87 per gallon, yet gasoline consumption dropped only 3.5%… Estimates of the long-run response to past movements in gasoline prices imply that a 10% price rise causes 5% to 10% less consumption, other things being equal … The nationwide average price of gasoline surged 53% from 1998 to 2004, after adjusting for inflation. Yet consumption was up 10% in this period … Of course, many other things changed in this period (1998-2004). Perhaps most important, income grew by 19%…This would ordinarily be expected to push gasoline sales up about 20%…. ” (Source: The New York Times) a) If other things remained the same, what would the data for the year to September 2005 imply about the price elasticity of demand for gasoline? (10 Points) b) What would the data for nationwide average price of gasoline from 1998 to 2004 imply about the price elasticity of demand for gasoline? (10 Points) c) Is your conclusion from Q2 indicates a violation of the Law of Demand? Explain. (10 Points) d) List some factors that might “bias” the estimate of the price elasticity of demand for gasoline. (12 Points) e) Given your answers to Q1-Q4, if you were making the pricing decision for the gasoline company, would you cut the price, raise the price, or leave the price unchanged? Explain. (6 Points) • Show less

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