Question

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

If the price of heating oil rises from $1.90 to $2.10 per gallon, the quantity of heating oil demanded will (Rise or Fall) by _____% in the short run and by___% in the long run. The change is (Smaller or Larger)   in the long run because people can respond (More or Less) easily to the change in the price of heating oil.

Answer 1

Answer: Suppose the price elasticity of demand for heating oil is 0.1 in the short run and 0.9 in the long run.

If the price of heating oil rises from $1.90 to $2.10 per gallon, the quantity of heating oil demanded will fall by 1.0526 % in the short run and by 9.4737% in the long run. The change is larger   in the long run because people can respond more easily to the change in the price of heating oil.

Explanation

Price elasticity of demand in short run = 0.1

Price elasticity of demand in long run = 0.9

Price increases form $1.9 to $2.10

Therefore percentage change in price =((2.10-1.9)/1.9)*100 = 10.5263%

Elasticity of demand = (Percentage change in Quantity Demanded)/(Percentage change in price)

Percentage change in Quantity Demanded= Percentage change in price* Elasticity of demand

Using the above formula,

Percentage change in Quantity Demanded in short run = 0.1*10.5263 = 1.0526%

Percentage change in Quantity Demanded in long run = 0.9*10.5263 = 9.4737%

Note: Assumption here is that oil is a normal good and therefore elasticities are negative.