Suppose that OPEC currently sets oil price at $1.50 per gallon, and the current consumption is 100 million gallons per day. The price elasticity of demand for oil is estimated to be 0.7 by the initial value method. If OPEC raises the oil price to $1.80 per gallon,
A)quantity demanded decreases by 10 million gallons while total sales revenue increases by $4.4 million per day.
B)quantity demanded decreases by 14 million gallons while total sales revenue increases by $4.8 million per day.
C)quantity demanded decreases by 10 million gallons and total sales revenue decreases by $4.4 million per day.
D)quantity demanded decreases by 14 million gallons and total sales revenue decreases by $4.8 million per day.

Question

Quizplus · Accepted Answer

The percentage change in price is 20% (($1.80-$1.50)/$1.50). With a price elasticity of demand of 0.7, the quantity demanded decreases by 14% (0.7 * 20%), which is 14 million gallons (14% of 100 million). The new quantity demanded is 86 million gallons. Total revenue increases from $150 million ($1.50 * 100 million) to $154.8 million ($1.80 * 86 million), an increase of $4.8 million.

Suppose That OPEC Currently Sets Oil Price at $1