Refer to the “World View” below: VIENNA—OPEC unexpectedly left its production le

Question

Refer to the “World View” below:

VIENNA—OPEC unexpectedly left its production levels unchanged on Wednesday, causing oil prices to jump.

The news caught markets by surprise, sending oil prices sharply higher. Benchmark crude for July delivery was up $1.25 to $100.34 per barrel in morning trading.

Saudi Arabia and other influential Gulf nations had pushed to increase production ceilings to calm markets and ease concerns that crude was overpriced for consumer nations struggling with their economies. Those opposed were led by Iran, the second-strongest producer within the Organization of the Petroleum Exporting Countries.

If the price elasticity of demand for oil is 0.55, by how much would oil prices have fallen in 2011 had OPEC increased output from 27 to 29 million barrels per day rather than holding output constant?

VIENNA—OPEC unexpectedly left its production levels unchanged on Wednesday, causing oil prices to jump.

The news caught markets by surprise, sending oil prices sharply higher. Benchmark crude for July delivery was up $1.25 to $100.34 per barrel in morning trading.

Saudi Arabia and other influential Gulf nations had pushed to increase production ceilings to calm markets and ease concerns that crude was overpriced for consumer nations struggling with their economies. Those opposed were led by Iran, the second-strongest producer within the Organization of the Petroleum Exporting Countries.

Explanation / Answer

%Change in Price

% change in Qd=( Q2-Q1)/Q2*100 =(29-27)/29 *100=0.0689= 6.9%

Ed= 0.55

Therefore, % Change in Price=0.069/0.55=12.54%

Therefore oil prices would have fallen by 12.54% in 2011.

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