Suppose that the statistical department of the California Power Company estimate

Question

Suppose that the statistical department of the California Power Company estimated that the price elasticity of demand for household natural gas is -1.4 in the short run and -2.1 in the long run, the income elasticity of demand is 1.2, the cross-price elasticity of demand for household gas and electricity is 0.8, and the elasticity of demand for household gas with respect to population is 1.0. Determine the change in the demand for household natural gas (a) in the short run and (b) in the long run if all the variables increase by 10 percent.

Explanation / Answer

price elasticity of demant =-1.4 in short run hence if 10% INCREASE IN PRICE WILL RESULT IN -1.4*10 =14.4% decrease in household gas in long run cdecrease in demand of household gas =2.1*!0 =21%

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