Americans Start to Curb Their Thirst For Gasoline: Discussion (220 words)

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Question

Read the article "Americans Start to Curb Their Thirst For Gasoline", written by Ana Campoy from Wall Street Journal. Then, using the data in the article, calculate the short-run price elasticity of demand for gasoline, the long-run price elasticity, and the income elasticity of demand. What is the relationship between the short-run and long-run price elasticity? Is gasoline a normal good? Explain.

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The article states “A 10% rise in gasoline prices reduces consumption by just 0.6% in the short term, but it can cut demand by about 4% if sustained over 15 or so years, according to studies compiled by the Congressional Budget Office.” Since price elasticity is calculated as the absolute value of (percent change in quantity demanded) divided by (percent change in price) the short-run price elasticity is then .06 and the long-run price elasticity is .4. Since both coefficients are less than one, demand for gasoline is inelastic....

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