Question

The short-run elasticity of demand for gasoline sold at gasoline stations is 0.20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, if other things remain the same, the price per gallon will increase by:___________

Answer 1

25%

Step-by-step explanation:

Price elasticity of supply measures the responsiveness of quantity supplied to changes in price of the good.

Price elasticity of supply = percentage change in quantity supplied / percentage change in price

0.2 =5% / percentage change in price

percentage change in price = 5/0.2 = 25%

If the absolute value of price elasticity is greater than one, it means supply is elastic. Elastic supply means that quantity supplied is sensitive to price changes.

Supply is inelastic if a small change in price has little or no effect on quantity supplied. The absolute value of elasticity would be less than one

Supply is unit elastic if a small change in price has an equal and proportionate effect on quantity supplied.