If the elasticity of demand for oil is 0.5 and the elasticity of supply for oil is 0.3, then a 1 percent increase in the supply of oil would cause the price of oil to:
A) increase by 1.25 percent.
B) increase by 2.50 percent.
C) decrease by 1.25 percent.
D) decrease by 2.50 percent.

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the percentage change in price:

% Change in Price = (Elasticity of Demand / (Elasticity of Demand + Elasticity of Supply)) x % Change in Quantity

Substituting the given values, we get:

% Change in Price = (0.5 / (0.5 + 0.3)) x 1% = 0.625%

Since the elasticity of demand is less than the elasticity of supply, a 1% increase in supply would cause a relatively larger decrease in price. Therefore, the price of oil would decrease by 0.625%, which is closest to option C (1.25% decrease).

If the Elasticity of Demand for Oil Is 0