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Chapter 5 Problem and Applications 1. Suppose the price elasticity of demand for heating oil is 0.2 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?
Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions. 5. h Whart happems to the price of a cup of ofle? What happens to What happens to the price of a cup of coffee? What happens to total expenditure on cups of coffee? What happens to the price of donuts? What happens to total expenditure on donuts? b. c.
2 O 8. The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline. a. Use these data to estimate the price elasticity of demand for subway rides. b. According to your estimate, what happens to the Transit Authoritys revenue when the fare rises? Why might your estimate of the elasticity be unreliable? c.
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