According to The U.S. Energy Information Administration, the U.S. average retail price per gallon of regular motor gasoline has fallen 28% from its 2014 peak of $3.70 per gallon on June 23, to $2.68 per gallon on December 8. However, this price decline may not have much effect on automobile travel, and in turn, gasoline consumption. Gasoline is a relatively inelastic product, meaning changes in prices have little influence on demand. Air travel, especially for vacation, tends to be highly elastic: a 10% increase in the price of air travel leads to an even greater (more than 10%) decrease in the amount of air travel.

a.Draw two diagrams showing the market for gasoline where the demand is segmented into automobile travel and air travel. Include an appropriate title and label the demand curve, supply curve, equilibrium price and quantity in each graph.

(10 marks)

b.Suppose that, due to the shale boom, the price of gasoline fell 10%, using the graphs in part a. to illustrate the response of the demand for automobile travel and air travel to the change in the price of gasoline.

(10 marks)