El Niño wind patterns affected the weather across the United States during the w
ID: 1223628 • Letter: E
Question
El Niño wind patterns affected the weather across the United States during the winter of 1997–98. Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5Png – TEMP, where Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the TEMP variable tells us that:
each 1-degree increase in temperature over the normal average raises home heating oil sales by 1 unit
the average daily temperature has an impact only on the sales of natural gas
each 1-degree increase in temperature over the normal average lowers home heating oil sales by 1 unit
the average daily temperature has no impact on the sales of home heating oil
price elasticity of demand for home heating oil is 2
a.each 1-degree increase in temperature over the normal average raises home heating oil sales by 1 unit
b.the average daily temperature has an impact only on the sales of natural gas
c.each 1-degree increase in temperature over the normal average lowers home heating oil sales by 1 unit
d.the average daily temperature has no impact on the sales of home heating oil
e.price elasticity of demand for home heating oil is 2
Explanation / Answer
Option C.
This is because keeping all the other variables constant, differentiating quantity with respect to temperature we get the value of -1 which is the regression coefficient of Temperature.
Thus, one degree increase in temperature over the normal range lowers home heating oil sales by 1 unit.
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