Question

The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40°F. Assume that the average overnight low this month is 40°F. When the price of space heaters is P = $50, the price elasticity of demand is:

Answer 1

Answer:

The price elasticity of demand is -0.25.

Explanation:

Given:

Q = 250 - P + 2COOL ……………………. (1)

Differentiating equation (1) with respect to P, we have:

dQ/dP = -1

Also, we have:

COOL = 40°F - 40°F = 0°F, or 0

P = $50

Substituting the relevant values into equation (1), we have:

Q = 250 - 50 + (200 * 0)

Q = 200

Price elasticity of demand = (P / Q) * (dQ/dP) ……………… (2)

Substituting the relevant values into equation (2), we have:

Price elasticity of demand = (50 / 200) * (-1) = -0.25

Therefore, the price elasticity of demand is -0.25.