Question

2) Assume that the price elasticity of demand is 1.5 and supply is perfectly inelastic. And

suppose that the supply of the Palestinian olive oil has increased by 30%. What is the new

price if the old price is $10/KG? Explain.

Answer 1

Solution:

Price elasticity of demand (PED) = $\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; price}$

PED = 1.5

$\%\;change\; in\; quantity\; demanded = 30\%$

$Let\; \%\;change\; in\; price\;be= P$

PED = 1.5

1.5 = $\frac{30\%}{P}$

P = $\frac{30\%}{1.5} = 20\%$

Price has decreased by 20%

Previous price = $10

Price reduction by $20\%$ = ($100\% - 20\%) \times10 = \$8$

The new price is $\$8$