Question

suppose the price of elasticity for heating oil is 0.1 in the short run and 0.9 in the long run.

if the price od heating oil rises from $1.90 to $2.10 per gallon, the quantity of heating oil demand will (fall, rise) by _____% in the short run and by _____% in the long run. the change is (larger,smaller) in the long run because people can respond (more, less) easily to thr change in the price of heating oil.

Answer 1

Elasticity = %change in demand / %change in price

% change in price = (new price - old price) / Old price * 100

= (2.10-1.90)/(1.90) * 100 = 10.5%

%change in demand = elasticity *%change in price

In short run (when elasticity is 0.1)

%change in demand = 0.1*10.5 = 1.05%

In long run (when elasticity is 0.9)

% change in demand = 0.9*10.5 = 9.45%

The change is larger in long run, because people can respond more easily to the change in price of heating oil in long run.