Answer to Question #57846 in Microeconomics for Maria Rose

Question

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.

Answer 1

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%