QUESTION:
A noted economist has conducted a statistical estimation of the demand for gasoline in the U.S. that yielded the following elasticities:
Own-price elasticity: -0.05
Income elasticity: +1.58
Cross elasticity with respect to the price of new cars: -0.28
From these results:
a. Is the demand for gasoline “elastic” or “inelastic”? Explain.
b. Is gasoline a “normal” good or an “inferior” good? Explain.
c. Are gasoline and new cars “substitutes” or “complements”? Explain.
d. If the price of gasoline decreases by 1% and income increases by 1% (and all other conditions remain the same), will the aggregate amount (price x quantity) that gasoline buyers spend on gasoline increase, decrease, or remain the same? Explain.
