Question

1. Suppose Manitoba Hydro (the public corporation that provides natural gas to Manitobans) cuts in half the price of natural gas (a commonly used home heating fuel).
2. 1. What would be the impact on the market price and quantity of insulation (a construction/renovation material that reduces the amount of fuel required to heat a home)? Assume the market for insulation is perfectly competitive.
      • Use a supply and demand graph to explain.

Clearly label the price and quantity of insulation before and after the price increase of natural gas. Use words (complete sentences) to explain your graph

Answer 1

Insulation is a substitute good to Home heating fuel. When price of natural gas falls, it reduces the price of home heating fuel, which increases the quantity of heating fuel demanded, and decreases the demand for insulation. The demand curve for insulation shifts to left, decreasing price and decreasing quantity of insulation.

In following graph, D0 & S0 are initial demand and supply curves of insulation, intersecting at equilibrium point A with initial equilibrium price P0 and initial equilibrium quantity Q0. When demand decreases, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.