As we noted in the chapter, many economists have estimated the short-run and long-run elasticities of oil demand. Let’s see if a rise in the price of oil hurts oil revenues in the long run. Cooper, the author cited in this chapter, found that in the United States, the long-run elasticity of oil demand is –0.5.
a. If the price of oil rises by 10%, how much will the quantity of oil demanded fall: by 5%, by 0.5%, by 2%, or by 20%?
b. Does a 10% rise in oil prices increase or decrease total revenues to the oil producers?
c. Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the price of oil would have to permanently rise in order to get people to make big cuts in oil consumption. How much would the price of oil have to permanently rise in order to cut oil consumption by 50%?
d. France has the largest long-run elasticity of oil demand (–0.6) of any of the large, rich countries, according to Cooper’s estimates. Does this mean that France is better at responding to long-run price changes than other rich countries, or does it mean France is worse at responding?