In the Mythical Nation of Oz, Gasoline Used to Sell

question 210

Essay

In the mythical nation of Oz, gasoline used to sell for $1 a gallon, and the natives purchased 100,000 gallons a week. Four years ago, the price rose to $3 a gallon, and the natives reduced their quantity demanded to 90,000 gallons a week. Calculate the price elasticity for this change. Today, gas again sells for $1 a gallon in Oz, but the natives are only buying 70,000 gallons a week. What gives?

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Definitions:

Pork Bellies

Futures contracts that were historically traded on the commodity exchanges, representing 40,000 pounds of frozen, trimmed bellies of hogs, which are used to make bacon.

Maintenance Margin

The minimum amount of equity that must be maintained in a margin account to continue holding a position, set by a brokerage to prevent excessive borrowing based on volatile market values.

Margin Call

A margin call occurs when the value of an investor's margin account falls below the broker's required minimum level, prompting the investor to either deposit more funds or sell assets to cover the shortfall.

Margin Deposit

A deposit required by a broker from a client when they borrow from the broker to buy securities, serving as collateral for the loan.