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.
Solution.
Initial price "P_0=30"
Price elasticity "E_p=-0.5"
Change in quantity "=20\\%=0.2"
New price
"P_1=30\\times(1+\\frac{0.2}{|-0.5|})"
"P_1=30\\times 1.4 =42"
Percentage change in price
"=(\\dfrac{42-30}{30})\\times 100"
"=40\\%"
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