The elasticity of demand for oil is -0.5 and the elasticity of supply is 0.20. If the demand for oil increases 10 percent, what happens to the price of oil?
A) It increases by 14 percent.
B) It decreases by 20 percent.
C) It increases by 8 percent.
D) It increases by 40 percent.

Question

Quizplus · Accepted Answer

The price elasticity of demand and supply can be used to determine the change in price. The formula for the percentage change in price is: %ΔP = %ΔQd / (Ed + Es). Here, %ΔQd = 10%, Ed = -0.5, and Es = 0.20. Thus, %ΔP = 10% / (-0.5 + 0.20) = 10% / -0.3 = -33.33%. However, since the demand increase is positive, the correct calculation should be 10% / (0.5 + 0.20) = 10% / 0.7 = 14.29%, approximately 14%.

The Elasticity of Demand for Oil Is -0