Question #57846

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

Expert's answer

By definition, price elasticity is:

Price elasticity = %change in quantity demanded / %change in price

therefore:

%change in price = %change in quantity demanded / price elasticity

putting given values into the formula and keeping in mind that the price elasticity is constant, we get:

%change in price = -20% / -0.5

%change in price = 40%

The answer is:

the price of oil will increase by 40%

Price elasticity = %change in quantity demanded / %change in price

therefore:

%change in price = %change in quantity demanded / price elasticity

putting given values into the formula and keeping in mind that the price elasticity is constant, we get:

%change in price = -20% / -0.5

%change in price = 40%

The answer is:

the price of oil will increase by 40%

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