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Micro economics. Homework Question?
I just do NOT get this at all. Can anyone help me figure it out. Thanks.
5. Suppose the magnitude of the price elasticity of demand for gasoline is 0.4. At some future market price of gasoline, a then increase in the world price of oil induced by a severe deepwater drilling accident that occurred within the past year followed by a subsequent moratorium on deep-sea drilling shifts the supply curve for gasoline leftwards driving the price of gasoline up by a certain percentage. Consumers reduce quantity demanded of gasoline by 10% in response to this future price increase. By what percentage did the price rise? Please show your work.
You are given the price elasticity of demand (0.4) and the percent change in quantity demanded (10%)
So use the formula for Elasticity of Demand and your algebra skills to solve this:
E.D. = %change in Quantity Demanded / % change in Price
0.4 = 10% / X
0.4 X = 0.10
X = 0.10 / 0.4
X = .625 which is 62.5 %
The percent change in price was 62.5 %.
This is how I would do it. Hope it helps.
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