Question

The long run elasticity of oil demand has been estimated at -0.5. If the price of oil rises by 10% how much will the quantity of oil demanded fall ?

Answer 1

By the definition of the elastiticity of demand, we have:

$$E_d=\dfrac{\%\Delta Q}{\%\Delta P},$$ $$\%\Delta Q=E_d\%\Delta P=-0.5\cdot10\%=-5\%.$$

Therefore, the quantity demanded of oil will fall by 5%.