Answer to Question #317940 in Microeconomics for aduy

Question

8. Elasticity problems:

a. The world demand for crude oil is estimated to

have a short-run price elasticity of 0.05. If the

initial price of oil were $100 per barrel, what

would be the effect on oil price and quantity of

an embargo that curbed world oil supply by 5 per-

cent? (For this problem, assume that the oil-supply

curve is completely inelastic.)

b. To show that elasticities are independent of units,

refer to Table 3-1. Calculate the elasticities between

each demand pair. Change the price units from

dollars to pennies; change the quantity units from

millions of boxes to tons, using the conversion fac-

tor of 10,000 boxes to 1 ton. Then recalculate the

elasticities in the fi rst two rows. Explain why you

get the same answer.

Answer 1

Elasticity of demand refers to the percentage change in quantity demanded as a result of a 1% price shift.

The oil supply is considered to be inelastic, and the supply curve to be vertical. The oil supply would be reduced by 5% in this scenario, moving it to the left.

There will be an increase in the price of oil and a decrease in the demand for it. There is a 5% change in quantity needed, and there is a 5% decrease in supply.

Calculate the price change as follows:

the elasticity of demand, is 0.05, then:

$e = \frac{change .in. quantity }{Price}$

​$0.05 = \frac{5}{ \Delta Price}$

Percentage Change in $Price = 100$

As a result, the price of oil will rise.

$30$\times2 =$ $60 per barrel.

As a result, the price will increase by 100%, from $30 to $60 a barrel, and the quantity will decrease by 5%.

b)

If the quantities are changed: multiply the p’s by 100 (100 pennies in a dollar), and Q’s by 100.

Calculate as follows:

The elasticities do not change. It indicates that the elasticities are unaffected by the unit. The reason for this is that the elasticity is calculated using both the numerator and denominator percentage changes.