Monday, March 13, 2006

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? :)

4 comments:

Reid said...

I'm not actually responding to the post, just saying that the blog is actually really helping. I like it, but when it comes to test anxiety and lack of concentration, let's just say that with these two things, a ceiling was put on my test taking ability. Any suggestions, on how to get over that. I know I get it outside of the test, the blogs make sense, so I just need to apply it when I take the test. Easier said than done. Thanks for the positive comments on the blogs too.

Reid said...

This is responding to the post. "Oh."

forsnic said...

well since i actualy have something relevant to say.. cough cough reid. jk :) yeah i think i was having a hard time grasping that whole concept for a while. i was messed up by the negative at first, then i remembered that it didn't matter!! but now i actually calculated it and it was SUPER easy. thanks for helping to explain it! :)

gorman said...

that definetely simplifies the equation...i had no idea how to do this but it looks so easy now that you did it