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.
By definition, price elasticity is:
Price elasticity = %change in quantity demanded / %change in price
%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%