Having worked for many of the firms in the petroleum industry,you know that the price elasticity of demand for a representative firm is about −1.25.An industry publication recently reported that the Rothschild index for the petroleum industry is estimated to be 0.88.Based on this information,you know that the price elasticity of demand for the firm you currently work for in the petroleum industry is:

Question

Quizplus · Accepted Answer

The Rothschild index is a measure of the concentration of an industry. A higher Rothschild index indicates higher concentration, suggesting a relatively smaller number of large firms control a larger portion of the market. The price elasticity of demand for a representative firm can be estimated using the following formula:

Price elasticity of demand = −(Rothschild index) × (elasticity of demand for the industry)

Substituting the given values, we get:

Price elasticity of demand = −(0.88) × (−1.25) = 1.1

Since the elasticity of demand is negative by definition, we take the absolute value of 1.1 and multiply it by −1 to get:

Price elasticity of demand = −1.1

Therefore, the price elasticity of demand for the firm you currently work for in the petroleum industry is estimated to be −1.1, which is closest to choice A) −1.42.

Having Worked for Many of the Firms in the Petroleum