Suppose the local utility regulators have recently approved an
increase in the price of electricity from 10 kilowatt-hour to 10.5
killowatt-hour. The long run price elasticity of demand for
electricity is estimated to be -1.2.

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Question: Suppose the local utility regulators have recently approved an increase in the price of electrici…
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a. by how much will the quantity demanded of electricity drop in
the long run because of this price increase?

b. when the price of electricity increases, will consumers’
total expenditures on electricity rise or fall in the long run?

c. The cross elasticity of deman for electricity with respect to
natural gas is 0.2. By how much would the price of natural gas have
to change to totally offset the effect that the price increase in
electricity has on the quantity of electricity consumed? In other
words, by how much would the price of natural gas have to change to
cancel out the fall in the quantity demanded that you calculated in
part a.

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