Suggested solution: Consumers have very little ability to respond to a gasoline price increase in the short run. While they may be able to cut down on driving slightly, their day-to-day life, driving to work, school, and so on, will continue, with the consumption of gas remaining about the same. This means that the responsiveness of consumers to the price change is relatively low. A low responsiveness results in the price increase being greater than the reduction in quantity demanded Consequently, in the short run, the price elasticity of demand is less than one or inelastic. Over the long run, consumers can buy more fuel efficient cars, move closer to work, or start using mass transit. These actions will reduce fuel consumption and increase consumers’ responsiveness to changes in the price of gasoline. Therefore, demand for gasoline may become price elastic in the long run. (Answers may vary.)

Suggested solution: If a firm is considering a price increase, it would be interested in understanding the impact of the price increase on its revenue. If a firm knows that the demand for its product is price inelastic, it can conclude that the percentage change in the quantity demanded of its product will be less than the percentage change in its price. Hence, in such cases, an increase in the price of the product will lead to an increase in the revenue of the firm. (Answers will vary)

Suggested solution: Since cross price elasticity measures the responsiveness of quantity demanded of one good to changes in the price of another good, a business owner can use this knowledge to anticipate changes in the demand for his products in response to changes in the price of other goods. For example, ketchup and hamburgers are complements so cross elasticity of demand is negative. If the price of beef goes up, say due to a drought, the price of hamburgers will also go up, and people will consume less of them. As a result, people would also buy less ketchup. Hence, the ketchup producer should plan to produce less when he/she expects beef prices to rise. (Answers may vary.)