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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.

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