Suppose that the price elasticity of demand for heating oil is -0

Economics Dec 18, 2020

Suppose that 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 $0.45 to $0.55 per liter, what happens to the quantity of heating oil demanded in the short run? In the long run?

Expert Solution

The price increase is (0.55 - 0.45)/0.45 = 22.22 percent. In the short run, the elasticity implies that quantity of heating oil demanded will decline by (22.22*0.2) = 4.44 percent in the short run, and by (22.22*0.7) = 15.55 percent in the long run.

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