4. Consider the market for gasoline. Gasoline demand is inelastic in the short run and elastic...

4. Consider the market for gasoline. Gasoline demand is inelastic in the short run and elastic in the long run.

a. (4) Why is gasoline inelastic in the short run and elastic in the long run?

b. (2) Draw the short run and long run markets for gasoline labeling equilibrium price and quantity. P Q Short run P Q Long run Now suppose the supply of gasoline doubles.

c. (2) Draw this change on the graphs above.

d. (2) Does the price of gasoline change more in the short run or the long run?

e. (2) Does the quantity of gasoline change more in the short run or the long run?

Solutions

Expert Solution

4.a. Gasoline is ineslastic in the short run because it takes some time for consumers to both notice and respond to the price change by adjusting demand. While in the long run the consumers are aware of the price change and have adjusted their goods basket accordingly so demand is elastic.

b.D is the demand, S1 and S2 - initial and final supply. e1 and e2 - initial and final equilibrium.

c. When supply doubles supply curve shifts rightwards causing prices to fall and quantity to rise. P1 and P2 - initial and final price. Q1 and Q2 - initial and final quantity.

d. The price decreases more in the short run as increase in supply has decreased prices while the responsiveness to this fall with a increase in demand is slow to happen. In the long run prices decrease less because the demand has increased in long run due to high responsivess on people.

e. The quantity changes more in the long run. This is becauses of the elastic demand in the long run. More people have shifted to using petrol.

Rahul Sunny answered 1 year ago

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