19. The elasticity of demand for oil is about -0.5, and the elasticity of supply

Question

19. 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? (2 pts) 20. The elasticity of demand for a good is-075. A 4% increase in price will cause lead to what change in quantity demanded? (2 pts) 21. Circle one option in the following parentheses: Since the demand curve for computer chips is elastic, a decrease in the price of computer chips caused by an increase in productivity will_(increase/decrease) revenue for the computer chip industry (l pt)

Explanation / Answer

19) % change in quantity = % change in price / demand elasticity + supply elasticity

3% = % change in price/(-0.5 + 0.3)

% change in price = -0.06%. Hence price falls by 0.06%

20) Using elasticity formula we have

ed = % change in quantity / % change in price

-0.75 = % change in quantity / 4%

The quantity demanded will fall by 4*0.75 = 3%

21) When demand is elastic, decrease in price increases revenue. Hence the correct choice is increase.

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