Refer to the “World View” below: World View: OPEC Agrees to Maintain Its Oil Out

Question

Refer to the “World View” below:

World View: OPEC Agrees to Maintain Its Oil Output Ceiling at 30 Million Barrels per Day

VIENNA, June 11 (AFP)—OPEC, the oil exporters’ cartel, opted Wednesday to keep its output ceiling unchanged, expressing confidence in the market despite global supply strains that have kept prices high this year. The Organization of Petroleum Exporting Countries (OPEC), which pumps one-third of the world’s oil, said that member nations had decided to hold their collective production target at 30 million barrels per day (bpd), where it has stood since late 2011. Saudi Arabia, the cartel’s most influential player and biggest producer, added after the announcement that it was “very happy” with the state of the global oil market. The oil market held in positive territory after the OPEC decision, with Brent North Sea crude up 40 cents at $109.92 a barrel.

If the price elasticity of demand for oil is 0.2, by how much would oil prices have fallen in 2014 had OPEC increased output from 30 to 32 million barrels per day rather than holding output constant?

______%

Explanation / Answer

price elasticity of demand = Percentage change in quantity demanded / Precentage change in price

Percentage change in quantity demanded = 32 million - 30 million / 30 million * 100 = 6.67 per cent

-0.2 = 6.67 / x

x = 6.67 / .2 = 33.35

Thus prices must have fallen by 33.35 per cent.

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