Recall the Application about how changes in supply affect the price of gasoline to answer the following question(s).
-Recall the Application. Suppose the price elasticity of demand for gasoline is 0.20 and the price elasticity of supply for gasoline is 0.55. If supply decreases by 50 percent, the equilibrium price will increase by
A) 67 percent.
B) 70 percent.
C) 143 percent.
D) 150 percent.

Question

Quizplus · Accepted Answer

The percentage change in price can be calculated using the formula: %ΔPrice = (%ΔQuantity / (Elasticity of demand + Elasticity of supply)). Here, %ΔQuantity is -50% (since supply decreases by 50%), Elasticity of demand is 0.20, and Elasticity of supply is 0.55. Plugging these values in gives %ΔPrice = (-50% / (0.20 + 0.55)) = -50% / 0.75 = -66.67%, which means the price increases by approximately 67%.

Recall the Application About How Changes in Supply Affect the Price