Recall the Application about how changes in supply affect the price of gasoline to answer the following question(s).
-Recall the Application.Suppose that the price elasticity of demand for gasoline is 0.20 and the price elasticity of supply for gasoline is 0.70.What will happen to the equilibrium price if the demand goes down by 30%?
A) The equilibrium price will increase by 3%.
B) The equilibrium price will decrease by 3%.
C) The equilibrium price will increase by 33.33%.
D) The equilibrium price will decrease by 33.33%

Question

Quizplus · Accepted Answer

Using the formula (% change in price) = (% change in quantity demanded) x (elasticity of demand) / (elasticity of demand + elasticity of supply), we can calculate the percentage change in price as follows:

(% change in price) = (-30%) x (0.20) / (0.20 + 0.70) = -6%

This means that the equilibrium price will decrease by 6%. Therefore, the correct answer is D: the equilibrium price will decrease by 33.33%, which is the closest option to our calculated answer of -6%.

Recall the Application About How Changes in Supply Affect the Price