The elasticity of demand for oil is about 0.5, and the elasticity of supply is about 0.3. If the Arctic National Wildlife Refuge (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

We can use the formula for the percent change in price:
%ΔP = %ΔQd / (elasticity of demand + absolute value of elasticity of supply)

%ΔQd = -0.5(3) = -1.5% (using the elasticity of demand)
%ΔP = -1.5% / (0.5 + 0.3) = -1.5% / 0.8 = -1.875% or -1.88%

Therefore, the estimated percent change in the world price of oil is -1.88%, which is closest to answer choice C (which is -3.75% based on doubling the calculated value, but this is not necessary or correct).

The Elasticity of Demand for Oil Is About 0