Question #53519

The price of oil is $30 per barrel and the price elasticity is constant and equal to -0.5. An oil embargo reduces the quantity available by 20 percent. Use the arc elasticity formula to calculate the percentage increase in the price of oil.

Expert's answer

If he price of oil P = $30 per barrel and the price elasticity is constant and equal to E = -0.5, and if an oil embargo reduces the quantity available by 20 percent, the new price of oil using the arc elasticity formula will be P2 = 30*(1 + 0.2/|-0.5|) = 30*1.4 = $42.

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