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# Finance: Tennessee gasoline prices, increase in disposal income, decrease in travel

1. Research the gasoline prices in 1956 (average cost in April) to the cost of gasoline in 2005 (average cost in April) in Tennessee and determine:

a. What increase is required in disposable income to meet the difference of the cost of gasoline?
b. Considering the choice of substitution. What would you advise your leadership to do to offset the cost of gas in your corporation?
c. What percentage of decrease in travel, in your view, will take place in the United States?
d. Assuming gas prices have increased 65%, a loss of 35% in sales, and the average annual income for a gasoline station is \$900,000 what would be the loss of income to 5,000 gasoline stations? Would this loss create a positive or negative impact on the public? Discuss the impact on spending, income and at least two other affects.

#### Solution Preview

Gasoline prices in 1956 and in 2005 per gallon
April, 1956 \$2.90
April 2005. \$46.63/\$46.38

Reference:
www.ioga.com/Special/crudeoil_Hist.htm - 67k
a. What increase is required in disposable income to meet the difference of the cost of gasoline?

Economists use marginal analysis to the relationship between changes in disposable income and changes in consumption.

Marginal analysis seeks to answer questions like, "If U.S. households receive another billion dollars in disposable income, what will happen to consumption spending, what about savings?"

? MPC = change in consumption divided by the change in disposable income
? MPS = change in consumption divided by the change in disposable income
? Since disposable income is either saved or consumer: MPC + MPS = 1

The slope of the consumption function is the MPC. Because the slope of a line constant everywhere along the line, the MPC for any linear consumption function will be constant at all levels of income.

The slope of the saving function equals the MPS. It is also a positive fraction that represents a leakage rate from increases in household income in the circular flow of income. Because the slope of a line is the same everywhere on that line, the MPS for any linear savings function is constant for all levels of income.

The savings function can be ...

#### Solution Summary

In a 905 word response, the solution provides excellent answers to each question.

\$2.19