Answer to Question #275981 in Microeconomics for Mohad Houshya

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 $\$8$