Question from "Elasticity Stuff..."

Since no one went back to this one, I wanted to make sure to get the info out to you.

This was the question:

Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -.20. Suppose that international hostilities lead to a sudden cut off of crude oil supplies. As a result, US supplies of refined gasoline drop 10%. If gasoline was selling for $1.40 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?


I pointed out before that you now have the elasticity (-.2, or for our sake, .2), but how do you determine the percentage change in price from the info given?

Remember: elasticity = % change in quantity over % change in price

So - you have elasticity at -.2, the % change in Q as 10, and need the % change in price

What do you need to make the elasticity at .2 when the change in Q is 10? you need 50% -- therefore you would see a 50% price increase - from $1.40 to $2.10, since 50% of $1.40 is $.70.

Comments? :)