Choose a product which you are familiar with. Using the internet for research (please cite your...

Choose a product which you are familiar with. Using the internet for research (please cite your source), what is the price elasticity of demand for this product or group of products? What does that mean with respect to a 10% increase in the price of this good? What happens to quantity demanded?

Which of the 4 determinants of price elasticity of demand do you believe drives this outcome about the good's price elasticity? If there is more than one determining factor, please explain your reasoning. [for many goods, all of the 4 determinants come into play - I just want you to choose the one or two that you believe are most relevant).

Expert Solution

SOLUTION:-

Let us take the example of gasoline ( fuels for running vehicles ).

* Price elasticity of demand shows how elastic the demand for a product is when its price changes.

* If a product is inelastic such as gasoline with no substitutes, even a large rise in prices doesn't have large impact on its quantity demanded.

* Whereas if a product is elastic even a small increase in prices would lead to huge fall in demand.

* Average price elasticity of demand for gasoline is -0.26.

* A 10% increase in price of gasoline leads to fall in its demand by 2.6%.

The four determinats of price elasticity of demand are-

(I) Substitutes

(II) Share of income.

(III) Time.

(IV) Nature of products.

* I believe not having any substitues for gasoline is the main reason why its price elasticity of demand is so inelastic.

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Rahul Sunny answered 2 years ago

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