Suppose that gasoline prices increase dramatically this month.Lola commutes 100 miles to work each weekday.Over the next few months,Lola drives less on the weekends to try to save money.Within the year,she sells her home and purchases one only 10 miles from her place of employment.These examples illustrate the importance of
A)the availability of substitutes in determining the price elasticity of demand.
B)a necessity versus a luxury in determining the price elasticity of demand.
C)the definition of a market in determining the price elasticity of demand.
D)the time horizon in determining the price elasticity of demand.

Question

Quizplus · Accepted Answer

Lola's behavior changes over time, indicating that the price elasticity of demand for gasoline is affected by the time horizon. In the short run, Lola continues to commute despite the increased gasoline prices, indicating a relatively inelastic demand. However, in the long run, Lola changes her behavior by driving less and eventually moving closer to her job, indicating a more elastic demand. This shows that the time horizon is an important factor in determining the price elasticity of demand for gasoline.

Suppose That Gasoline Prices Increase Dramatically This Month