A shift of the supply curve of oil raises the price of oil from $9.50 a barrel to $10.50 a barrel and reduces the quantity demanded from 41 million to 39 million barrels a day. The price elasticity of demand for oil is:

• A. 2 million barrels a day per dollar.
• B. 0.5
• C. $1 per 2 million barrels a day.
• D. 2.0

Answer: (B)

Price elasticity of demand measures how much quantity demanded responds to a price change. It is the percentage change in quantity demanded divided by the percentage change in price.

In this scenario, the price rises from $9.50 to $10.50, a change of $1 on $9.50, which is about a 10.5% increase. Quantity demanded falls from 41 million to 39 million, a drop of 2 million on 41 million, about a 4.9% decrease.

Elasticity = (-4.9%) / (10.5%) ≈ -0.46. Taking the magnitude, the elasticity is about 0.46, roughly 0.5.

Since the absolute value is less than 1, demand is inelastic over this range. The other options don’t match a dimensionless elasticity around 0.5 (they either state units or give a value far from the calculated ratio).