   Chapter 5, Problem 3PA

Chapter
Section
Textbook Problem

Suppose the price elasticity of demand for heating oil is 02. in the short run and 0.7 in the long run.a. If the price of heating oil rises from $1.80 to$2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)b. Why might this elasticity depend on the time horizon?

Subpart (a):

To determine
Price elasticity of demand.

Explanation

By midpoint method; the percentage change in the price is calculated as follows:

Percentage change in price=(2.201.80)((2.20+1.8)2)×100=0.42×100=20%

Percentage change in price is 20%.

In the short run, when the price elasticity is 0.2, the change in quantity demanded is calculated as follows

Subpart (b):

To determine
Relevance of price elasticity of demand.

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