Suppose that, at the market clearing price of natural gas, the price elasticity of demand is -1.2 and the price elasticity of supply is 0.6. What will result from a price ceiling that is 10 percent below the market clearing price?
A) A shortage equal to 1.8 percent of the market clearing quantity
B) A shortage equal to 0.6 percent of the market clearing quantity
C) A shortage equal to 18 percent of the market clearing quantity
D) A shortage equal to 6 percent of the market clearing quantity
E) More information is needed.

Question

Quizplus · Accepted Answer

The shortage is calculated by adding the absolute values of the elasticities of demand and supply, then multiplying by the percentage change in price: (1.2 + 0.6) * 10% = 18%.

Suppose That, at the Market Clearing Price of Natural Gas