The price elasticity of gasoline in the United States has been Essay

The price elasticity of gasoline in the United States has been estimated to be 0.15. if this is so, should profit maximizing gasoline stations raise their prices Explain why or why not - Essay Example Since gasoline is considered as normal goods the income elasticity will be positive. The estimated price elasticity will vary according to income, demography and the geography. The demand for gasoline is closely associated with the fuel economy of the vehicles. If the price of the gasoline rises the profit maximizing gasoline companies will not be able to raise the prices according to their wish as in such cases the consumers will shift to the more fuel efficient vehicles which will ultimately lead to a fall in demand conditions for gasoline1. The rebounding effect will have a role to play in this case. The organizations may witness a rise in demand in the short run but in the long run the demand will not be persistent and in fact the demand will fall further than expected. Gillingham, K. 2011. How Do Consumers Respond to Gasoline Price Shocks? Heterogeneity in Vehicle Choice and Driving Behavior. Available at: http://www.umass.edu/resec/seminars/docs/Gillingham_ConsumerResponseGasPrices.pdf. [Accessed: 18th October,