Multiple Choice
Which of the following is a key determinant of the price elasticity of demand for a good?
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4. Elasticity
Determinants of Price Elasticity of Demand
Multiple Choice
Studies show that the demand for gasoline is typically which of the following, and why (based on determinants of price elasticity of demand)?
A
Highly elastic in the short run because consumers can quickly switch to many close substitutes for gasoline
B
Unit elastic because gasoline spending is always a constant share of consumers' budgets
C
Relatively inelastic in the short run because consumers have few immediate substitutes and it takes time to adjust driving habits or vehicle choices
D
Perfectly inelastic because gasoline has no substitutes in either the short run or long run
Verified step by step guidance1
Step 1: Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a good responds to a change in its price. It is calculated as \(\text{Elasticity} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
Step 2: Identify the determinants of price elasticity of demand relevant to gasoline, such as the availability of close substitutes, the proportion of income spent on the good, and the time consumers have to adjust their behavior.
Step 3: Analyze why gasoline demand is relatively inelastic in the short run: consumers have few immediate substitutes for gasoline, and it takes time to change driving habits or switch to more fuel-efficient vehicles.
Step 4: Contrast this with the idea of high elasticity, which would require many close substitutes and quick consumer response, which is not the case for gasoline in the short run.
Step 5: Conclude that because of these factors, the demand for gasoline is relatively inelastic in the short run, meaning quantity demanded changes less proportionally than price changes.
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