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

The price elasticity of demand using the arc elasticity formula can be found as follows:

$$E_d^{arc}=\dfrac{\%\ Change\ in\ Quantity\ Demanded}{\%\ Change\ in\ Price},$$ $$-0.5=\dfrac{-0.2}{\%\ Change\ in\ Price},$$ $$\%\ Change\ in\ Price=\dfrac{-0.2}{-0.5}\times100\%=40\%.$$

Therefore, the percentage increase in price is 40%.