Salvo and Huse (2012) found that roughly one-fifth of flexible-fuel (cars that c

Question

Salvo and Huse (2012) found that roughly one-fifth of flexible-fuel (cars that can run on a mix of ethanol and gasoline) car owners choose gasoline when the price of gas is 20% above that of ethanol (in energy-adjusted terms) and, similarly, one-fifth of these motorists choose ethanol when ethanol is 20% more expensive than gasoline. What can you say about these people's tastes?

Owners of flexible-fuel cars have preferences such that gasoline and ethanol are

A. imperfect substitutes.

B.perfect complements.

C.unrelated.

D.perfect substitutes.

E.normal goods.

Explanation / Answer

Gasoline and the Ethanol are perfect substitutes.

Perfect substitutes are those goods which can be used and function as the other good with which they are compared. Gasoline and Ethanol are used for the same function and as a perfect substitute. The answer is "D".

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