Question

3. In Germany, the elasticity of oil demand has been estimated at -0.5. How much would the price of oil have rise in order to cut oil consumption by 50%?

show your calculations to prove your answer

Answer 1

3. Price elasticity of demand = (% change in Quantity demanded / % change in price)

Or, -0.5 = ( -50 / % change in price)

Or, % change in price = (-50/-0.5) = 100%

Answer: price of oil will increase by 100%

4. PED = (% change in Quantity demanded / % change in price)

Or, % change in Quantity demanded = -0.5 * 10 = -5

It means quantity of oil demanded will fall by 5%