Question

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

a. If the price of heating oil rises from $1.20 to $1.80 per gallon, the quantity of heating oil demanded will by % in the short run and by % in the long run. The change is in the short run because people can respond easily to the change in the price of heating oil.
b. Why might this elasticity depend on the time horizon?

Answer 1

Answer: there is a 40% increase demand on a short run,

there is a 36.4% increase in demand on a long run

Elasticity depends on time horizon due to the possibility that oil substitutes might come into picture and people would prefer that over heated oil

Step-by-step explanation:

Price elasticity in short run= 0.1

Price elasticity in long run = 0.9

For the short run, % change in demand would be; 0.1 = %change in demand÷ 1.8-1.2/ 1.2+1.8/2

0.1 = %change in demand/ 0.6/1.5

%change in demand = 0.4

So, there is a 40% increase demand on a short run

For 0.9, %change in demand = 0.9 × 0.6/ 1.5 = 0.36

So, there is a 36.4% increase in demand on a long run

b) Elasticity depends on time horizon due to the possibility that oil substitutes might come into picture and people would prefer that over heated oil