If the short run price elasticity of demand is -.20 how much will a 10 percent...

If the short run price elasticity of demand is -.20 how much will a 10 percent increase

in the price of oil decrease the quantity demanded? Given this price elasticity will the total

revenue received by oil producers increase or decrease when oil prices rise? Explain why the

price elasticity of demand for oil more elastic in the long run. Draw your long run demand curve.

Solutions

Expert Solution

Short run price elasticity of demand is - 0.20, it means that 1 percentage increase in the price of oil decreases the quantity demanded by 0.20 percent.

Then, 10 Percent increase in the price of oil decrease the quantity demanded by= 10×0.20= 2 percent.

A 10 percent increase in the price of oil will decrease the quantity demanded by 2 percent.

Sense the quantity demanded decreases by less percentage as compared to the increase in the price, the demand is inelastic and the total revenue received by the oil producers will increase when oil price rise.

The price elasticity of demand for oil is more elastic in the long run because in the long run the time is enough for the consumers to respond to the the changes in the price with greater change in the quantity demanded as they discover new Substitutes.

The diagram is given below:

Rahul Sunny answered 1 year ago

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