Question 1

Suppose the market demand function for gasoline in Hamilton takes the linear form: Q=f(p) =abp, where a and b are positive constants.

A. If Q is measured in millions of litres per year and p is measured as the average price of gas in Hamilton in Canadian cents per litre, provide an economic interpretation of the slope of the demand function.

B. According to the local newspapers the market price of gasoline in Hamilton has increased on average by

9.8 cents in the last year and this resulted in an average decrease in aggregate quantity demanded by

39.2 million litres. What is the value of the slope of the demand function?

C. According to the local newspapers the annual average market price of gasoline in Hamilton was

95 cents per litre and aggregate quantity demanded was 1,220 million litres. Find and provide an economic interpretation

of the value of a.

D. Find and interpret the price elasticity of demand for gasoline at

p= 100. Provide an economic interpretation of this number. At this price, is demand elastic or inelastic? Is this result reasonable? Why or why not?