Consider the following two situations that should be familiar from a reading in class.
(i) Suppose that on account of shifts in the supply curve, the price of gasoline in the United States
falls by about $1 per gallon between June 2014 and June 2015. Suppose we use per capita
consumption data to construct an estimate of the elasticity of demand for gasoline.
(ii) Suppose two countries have similar incomes, population densities, and similar public transit
options, but differ in tax policy towards gasoline. The first country sets a gas tax that is $3 per gallon
higher than the gas tax in the second country, and this differential has existed for over thirty years.
Suppose the PD for gasoline is about $3 higher in the first country. (PD is the price consumers pay that
includes taxes.)
24. Which of the following estimates of the elasticity of demand for the two scenarios makes the most
economic sense?
a) 0.0 for (i), 0.0 for (ii)
b) 0.2 for (i), 0.2 for (ii)
c) 1.0 for (i), 1.0 for (ii)
d) 0.2 for (i), 1.0 for (ii)
e) 1.0 for (i), 0.2 for (ii)