One winter recently the price of home heating oil increased by20%and the quantit
ID: 1233617 • Letter: O
Question
One winter recently the price of home heating oil increased by20%and the quantity demanded decreased by 2 percent and with nochange in the price of wool sweaters the quantity demanded of woolsweaters increased by 10% . Use thsi information to answer thefollowing questions How would you describe the demand for home heating oil Calculate teh price elasticity of demand fro home heatingoil Is home heating oil likely to be a luxury good How did the total revenue from the sale from home heating oilchange calculate the cross elasticity of demand of wool swearterswith respect to the price of home heating oil One winter recently the price of home heating oil increased by20%and the quantity demanded decreased by 2 percent and with nochange in the price of wool sweaters the quantity demanded of woolsweaters increased by 10% . Use thsi information to answer thefollowing questions How would you describe the demand for home heating oil Calculate teh price elasticity of demand fro home heatingoil Is home heating oil likely to be a luxury good How did the total revenue from the sale from home heating oilchange calculate the cross elasticity of demand of wool swearterswith respect to the price of home heating oilExplanation / Answer
1. Demand for home heating oil is inelastic because the quantityfell by less than the price increased. 2. Elasticity is calculated as % chg in quantity demanded / % chgin price = 0.2/0.02 = 0.1 3. Home heating oil is unlikely a luxury good, but rather anecessity, which would explain why the elasticity is so low. 4. The total revenue increased after the price increase. That is,(P*1.2) * (Q*0.98) > P*Q 5. The two products would appear to be substitutes (less heatingoil, the more people are obliged to wear sweaters). The crosselasticity of demand is 10% / 20% = 0.5
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