Question

The price elasticity of demand for natural gas is - 1.3, and the price elasticity of supply for natural gas is 0.5. If the government imposes a ceiling price for natural gas that is 10 percent below the equilibrium price, the result will be a equal to percent of the equilibrium quantity. (Enter your response as a whole number. Do not use a percentage sign.)

Answer 1

If elasticity of demand is = -1.3, it means when price decreases by 1%, the quantity demanded will increase by 1.3%.

So, as given price decreases by 10%, then quantity demanded increased by 13%.

Again, elasticity of supply = 0.5, it means when price decreases by 1%, the quantity supplied will decrease by 0.5%.

So, as given price decreases by 10%, then quantity supplied decreased by 5%.

Hence,

Lets consider equilibrium quantity as Q,

Now, new quantity demanded = 1.13 x Q

and the new quantity supplied = 0.95 x Q

So, there will be a Shortage in the quantity.

Shortage = Total quantity demanded - Total quantity supplied = Q x (1.13 - 0.95) = 0.18Q

And in percentage, (0.18Q / Q x 100) = 18% of equilibrium quantity.