Determine roughly how much on average you drive each week and how much fuel you

Question

Determine roughly how much on average you drive each week and how much fuel you use. Now assume the price of fuel suddenly doubles in price. Consider how your driving habits will change if this fuel change is permanent in nature (i.e. it is not simply a change for one week but expected to last forever). Compute the percentage change in the number of miles driven and divide this by 1. The result of this calculation is similar to the concept of the PRICE ELASTICITY OF DEMAND and reflects your percentage change in your demand for gas divided by the percentage change in price (100%).

Now compute the revenue earned by a gas station before and after the price change. Does the gas station earn more revenue when prices are higher or lower based on your propensity to consume gas? Will this be true for everyone?

Explanation / Answer

Answer : As i assume that in a week i drived

Average drive per week 500 km 480 km

Price of fuel $0.80 $1.60

Total revenue $400 $768

Price elasticity of demand = % change in demand / % change in price = -20/0.8 = -25

This shows that price elasticity of demand is inelastic because as when price increase demand does not decrease at a greater phase.

The gas station will earn more revenue when price of gas fuel has been increased. It means that more revenue is generated as price increases and demand of the driving does not decrease at the same phase.

This is true for everyone because consumpation of gas cannot decrease with increase in price. As we know that with increase in price people do not stop driving but they controlled driving upto certian level but not at same phase or speed.

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