Question

Suppose you are told that the price elasticity of demand for petrol is equal to 0.5. Which of the

following is the correct interpretation of this number?

a) A 1% increase in price will result in a 50% decrease in quantity demanded.

b) A 1% increase in price will result in a 5% decrease in quantity demanded

c) A 1% increase in price will result in a 2% decrease in quantity demanded.

d) A 1% increase in price will result in a 0.5% decrease in quantity demanded
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Answer 1

Answer:

(a) A 1% increase in price will result in a 50% decreae in qn demanded

Answer 2

Answer:

Option a) A 1% increase in price will result in a 50% decrease in the quantity demanded

Explanation:

Oil has a low demand, which means that the demand for oil does not change much if its price changes, given how much the world economy depends on it. The supply of oil is also reasonably inelastic considering the complexity and cost of the process of stopping oil extraction initially.

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