Short-run price elasticity of demand for gasoline

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Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -0.20. Suppose that international hostilities lead to a sudden cutoff of crude oil supplies. As a result, U.S. supplies of refined gasoline drop 10 percent.

a. If gasoline were selling for $2.60 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?

b. Suppose that the government imposes a price ceiling on gas at $2.60 per gallon. How would the relationship between consumers and gas station owners change?

Reference no: EM131092343

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