According to data from the U.S. Department of Energy, the average retail price of regular gasoline rose from $1.16 in 1990 to $2.79 in 2010, a 140% increase.
a. Other things equal, describe the effect of this price increase on the quantity of gasoline demanded. In your explanation, make use of the utility-maximizing principle of marginal analysis and describe income and substitution effects.
In fact, however, other things were not equal. Over the same time period, the prices of other goods and services rose as well. According to data from the Bureau of Labor Statistics, the overall price of a bundle of goods and services consumed by an average consumer rose by 63%.
b. Taking into account the rise in the price of gasoline and in overall prices, other things equal, describe the effect on the quantity of gasoline demanded.
However, this is not the end of the story. Between 1990 and 2010, the typical consumer's nominal income increased, too: the U.S. Census Bureau reports that U.S.
median household nominal income rose from $29,943 in 1990 to $49,445 in 2010, an increase of 65%.
c. Taking into account the rise in the price of gasoline, in overall prices, and in consumers' incomes, describe the effect on the quantity of gasoline demanded.