The elasticity of demand for oil is about 0.5, and the elasticity of supply is about 0.3. If ANWR were drilled and the world supply of oil increased by 3 percent, what is the estimated percent change in the world price of oil?
A) -1.25 percent
B) -2.50 percent
C) -3.75 percent
D) Unknown

Question

Quizplus · Accepted Answer

Using the formula for the percentage change in price:
% change in price = % change in quantity demanded - % change in quantity supplied
% change in price = -0.5(3) - 0.3(3)
% change in price = -1.5 - 0.9
% change in price = -2.4
Therefore, the estimated percent change in the world price of oil is -2.4%, which is closest to -3.75%. Therefore, the best choice is C.

The Elasticity of Demand for Oil Is About 0