2. Does an increase in fuel efficiency reduce gasoline consumption? Aa Aa The de

Question

2. Does an increase in fuel efficiency reduce gasoline consumption? Aa Aa The demand for gasoline is derived from the demand for transportation services. For this specific example, think of the demand for transportation services as the number of miles people want to drive each month. You can safely assume that the quantity of miles demanded each month is directly related to how much it costs to drive an additional mile (the marginal cost of gasoline per mile) To figure out how much it costs to drive an extra mile, we need to know the fuel efficiency (miles per gallon, or mpg) of the driver's car, along with the price of gasoline. Suppose the price of gasoline is $6 per gallon and Carrie drives a truck that gets 10 miles per gallon. For Carrie, the marginal cost of gasoline per mile is $6 per gallon divided by 10 miles per gallon, or $0.60 per mile Let's explore how changes in fuel efficiency affect the driving habits of two drivers, Marlo and Rhonda Assume that Marlo and Rhonda each drive identical cars that get 25 miles per gallon. When gas costs $4.00 per gallon, they each drive 1,500 miles per month, when gasoline is $4.00 per gallon, the extra cost of driving one additional mile (the marginal cost per mile) is spend They each buy gallons of gasoline per month, and at $4.00 per gallon, they each per month on gasoline. Assume each driver buys the same new, more fuel-efficient car that gets 32 mpg. When gasoline is $4.00 per gallon, the marginal cost per mile for the new car is

Explanation / Answer

(1) When gasoline is at $4, marginal cost per mile is $0.16 (= $4/25). They each buy 60 gallons per month (= 1,500/25) and they each spend $240 (= $4 x 60).

(2) Marginal cost per mile for new car is $0.125 (= $4/32).

(3) Marlo buys 57.8125 (= 1,850/32) gallons of gasoline per month and spends $231.25 (= $4 x 57.8125). With new car, Marlo buys less** gasoline per month. Marlo's price elasticity of demand is -0.86.

[Elasticity = [(1,850 - 1,500) / (1,850 + 1,500)] / [$(0.125 - 0.16) / $(0.125 + 0.16)]

= (350 / 3,300) / (-0.035 / 0.285) = -0.86]

(4) Rhonda buys 62.55 (= 2,000/32) gallons of gasoline per month and spends $250 (= $4 x 62.5). With new car, Rhonda buys more** gasoline per month. Rhonda's price elasticity of demand is -1.16.

[Elasticity = [(2,000 - 1,500) / (2,000 + 1,500)] / [$(0.125 - 0.16) / $(0.125 + 0.16)]

= (500 / 3,500) / (-0.035 / 0.285) = -1.16]

**Provide drop-down options (if any), in Comment section.

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