Estimates of the long-run response to past movements in [gasoline] prices imply

Question

Estimates of the long-run response to past movements in [gasoline] prices imply that a 10 percent price rise causes 5 to 10 percent less consumption, other things being equal. Of course, many other things changed in this period. Perhaps most important, [incomes] grew by 19 percent. ... This would ordinarily be expected to push gasoline sales up about 20 percent. The New York Times, October 13, 2005 Complete the following sentences. The price elasticity of demand for gasoline in the long run______. The income elasticity of demand implied by the information given in the news clip is __________.

Explanation / Answer

The price elasticity of demand for gasoline, in the long run, is inelastic i.e. a change in the price by 10% cause a change in the demand by the less than the price increase.  

The income elasticity of demand implied by the information given in the news clip is "positive". i.e. with an increase in the income, the consumption increased but not proportionate to it.

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