Question

The elasticity of demand for oil is about 0.5, and the elasticity of supply is about 0.3. If the Arctic National Wildlife Refuge (ANWR) were drilled and the world supply of oil increased by 3%, what is the estimated percent change in the world price of oil?

a. -1.25%
b. -3.75%
c. Unknown
d. -2.50%

Answer 1

The estimated percentage change in the price of oil=10%

Step-by-step explanation:

Elasticity of supply is a measure of how the supply of a particular commodity or product changes with price change.

Elasticity of supply can be expressed as;

Elasticity of supply=Percentage change in quantity supplied/percentage change in price

where;

Elasticity of supply=0.3

Percentage change in quantity supplied=3%

Percentage change in price=unknown=x

replacing;

Elasticity of supply=Percentage change in quantity supplied/percentage change in price

0.3=3%/x

x=3%/0.3

x=10%

The estimated percentage change in the price of oil=10%