Question

1. Now, consider a related energy market – natural gas – and the impact of a decrease in oil prices. Describe, in words and graphically, what happens to supply, demand, equilibrium price and quantity in the U.S. market for natural gas. Be clear about the mechanisms at play. Then, label the areas in the graph and use a welfare table to show changes in consumer surplus, producer surplus, and total surplus. Explain in words who gains and who loses.

2.  Explain in words only if the following statements are true or false. If the statement is false, explain what is wrong with it as it is currently written. If the statement is true, explain why it is true.

a) The price elasticity of demand for gasoline is likely to be low.

b) When senior citizens get discounted metrocards, their consumer surplus for a subway ride is higher than that of non-senior citizens, who do not get the discount.

Answer 1

The number of questions answered as HOMEWORKLIB guidelines.

(a)The price elasticity of demand for gasoline is likely to be low.- True

Price elasticity measures the responsiveness of demand to changes in price, that is, percentage change in quantity demand with respect to percentage change in price level. Since gasoline is almost a necessity with no close substitutes, it is relatively price inelastic. This implies that changes in prices have little influence on its demand since the consumer can not switch to a close substitute.

(b)When senior citizens get discounted metrocards, their consumer surplus for a subway ride is higher than that of non-senior citizens, who do not get the discount- True

Consumer surplus is the difference between what a consumer is willing to pay and what he actually pays. Since discounted metrocards mean paying lower prices, the difference between what you are willing to pay and what you actually have to pay widens. That is, the consumer surplus increases. Hence, their consumer surplus is higher than that of citizens who do not get discount.