Question
Europeans Consume 45% of all gasoline produced worldwide -With the law of demand, you would expect that when gas prices continue to rise, the demand
Europeans Consume 45% of all gasoline produced worldwide
-With the law of demand, you would expect that when gas prices continue to rise, the demand would fall, but this isn't necessarily the case, especially in the short term. (10% increase in gas is associated with a 1-2% decrease in quantity of gas purchased.
-In 2004-2005, avg gas price went from up 55% ($1.87 -> 2.90), but consumption only went down 3.5% (9.15 mill barrels to 8.83 mill barrels daily)
-From 1998 to 2004, average gas went up 53%, but consumption also went up 10% when you would normally think it would go down by 26-53%.
a)The above are estimates of 1 year and 6 year response of gas quantities purchased to changes in gas prices. Utilizing the above data, what are the estimates (expressed in rages) for the 1 year (short term) and 6 year (long term) price elasticities of demand for European Gasoline.
b)Using your answer from a), what will happen in the short run to European consumer's total expenditures on gas as the price of gasoline rises. Will it stay the same, increase or decrease?
c)The figures from 2004-05 may overstate the drop in consumption because the head of energy in Europe measures gas before it reaches the retailer, and retailers may have used more of their inventories when there was a disruption in the supply chain. This implies a different short run price elasticity of demand for European gas than earlier studies estimate. What is this short run price elasticity?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started