2. If gasoline is a normal good and the price elasticity of demand for gas oline

Question

2. If gasoline is a normal good and the price elasticity of demand for gas oline is-1, this indicates: a) a 10% d c) a 10% decrease in the price of gasoline will increase the amount purchased by 10% e) a rise in the price of gasoline will increase the total revenue enjoyed by producers. ecrease in the price of gasoline will decrease the amount purchased by 10% a 10% decrease in the price of gasoline will decrease the amount purchased by 100% a 10% decrease in the price of gasoline will increase the amount purchased by 100%.

Explanation / Answer

Answer : 2) The correct option is e.

Here price elasticity of demand (Ed) = -1

We know that Ed < 1 means demand is inelastic. In case of inelastic demand if price rise then total revenue increase.

Given price elasticity of demand (Ed) = -1 < 1, which means here demand is inelastic for gasoline. Hence if gasoline price level increase then total revenue of producers will increase.

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