Question

Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 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 40% in the short run and by 14% in the long run. The change issmaller in the long run because people can respond less easily to the change in the price of heating oil.

Answer 1

Answer: Quantity demanded will fall by 2.1% in the short-run and by 7.3% in the long-run, larger

Explanation:

$Percentage change in price =\frac{2.10 - 1.90}{1.90} * 100$

= $\frac{0.20}{1.90} * 100$

= 10.25%

Short-run elasticity is 0.2

Long-run elasticity is 0.7

Therefore,

$percentage change in quantity in short run = 0.2 * 10.5$

=  2.10%

$percentage change in quantity in short run = 0.7 * 10.5$

=  7.35%

Quantity demanded will fall by 2.1% in the short-run and by 7.3% in the long-run.

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