Recall the Application about how changes in supply affect the price of gasoline,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

First, we need to determine the effect of the 30% decrease in demand on the equilibrium price. Using the price elasticity of demand formula (percentage change in quantity demanded divided by the percentage change in price), we get:

0.20 = -30% / percentage change in price
Percentage change in price = (-30%) / (0.20) = -150%

Therefore, the 30% decrease in demand will cause the equilibrium price to decrease by 150%.

Next, we need to determine the effect of the price elasticity of supply on the equilibrium price. Using the price elasticity of supply formula (percentage change in quantity supplied divided by the percentage change in price), we get:

0.70 = percentage change in quantity supplied / (-150%)
Percentage change in quantity supplied = 105%

Therefore, the 150% decrease in price will cause the quantity supplied to decrease by 105%.

Combining these two effects, the equilibrium price will decrease by (1 - 1.05) / (0.70 - 0.20) = 0.33.33%, or approximately 33.33%. Therefore, the correct answer is D.

Recall the Application About How Changes in Supply Affect the Price