Question

The price of oil is $30 per barrel and the price elasticity is constant and equal to -0.5. An oil embargo reduces the quantity available by 20 percent. Use the arc elasticity formula to calculate the percentage increase in the price of oil.

Answer 1

% change in quantity demanded = 20 = 0.2

% change in price = -0.5

Thus, PE_d = 0.2 / -0.5 = 0.4