Supply and Demand and Average Winter Temperature
Homework Questions
1) El Niño wind patterns affected the weather across the United States during the winter of 1997–1998.
Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5Png – TEMP, where
Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years.
A. What is the quantity of home heating oil demanded? 6.6 units
B. How much did change in winter temperature effect demand in comparison to the average winter temperature? 12 units
C. What is the estimated price elasticity of demand for home heating oil? |(-2) Phho/Q |= 2 (1.2/6.6)=0.364
D. If the sellers of home heating oil are profit maximizers, how should price be adjusted?
From the information we have we cannot determine is price should be changed. Point Price Elasticity is less than 1 in absolute value so revenues can be increased by raising price. Therefore the company might want to experiment with raising the price.
2) The accompanying table describes Ben’s preferences over cake and ice cream. The utility from consumption of one good is independent of the consumption of the other. The price of cake is $10 per unit, and the price of ice cream is $4 per unit. MU stands for Marginal Utility
Units
MU
MU
Consumed
Cake
Ice Cream
1
80
20
2
60
19
3
40
18
4
20
17
5
15
16
a. If Ben has $50 to spend, the optimal combination of these goods is? 3 cakes, 5 ice cream
b. Ben’s total utility at this optimal consumption bundle will be? 270 utils
c. Now suppose Ben has $70 to spend. How do the answers to question a & b above change?
It does not tell us how much utility Ben get
1) El Niño wind patterns affected the weather across the United States during the winter of 1997–1998.
Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5Png – TEMP, where
Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years.
A. What is the quantity of home heating oil demanded? 6.6 units
B. How much did change in winter temperature effect demand in comparison to the average winter temperature? 12 units
C. What is the estimated price elasticity of demand for home heating oil? |(-2) Phho/Q |= 2 (1.2/6.6)=0.364
D. If the sellers of home heating oil are profit maximizers, how should price be adjusted?
From the information we have we cannot determine is price should be changed. Point Price Elasticity is less than 1 in absolute value so revenues can be increased by raising price. Therefore the company might want to experiment with raising the price.
2) The accompanying table describes Ben’s preferences over cake and ice cream. The utility from consumption of one good is independent of the consumption of the other. The price of cake is $10 per unit, and the price of ice cream is $4 per unit. MU stands for Marginal Utility
Units
MU
MU
Consumed
Cake
Ice Cream
1
80
20
2
60
19
3
40
18
4
20
17
5
15
16
a. If Ben has $50 to spend, the optimal combination of these goods is? 3 cakes, 5 ice cream
b. Ben’s total utility at this optimal consumption bundle will be? 270 utils
c. Now suppose Ben has $70 to spend. How do the answers to question a & b above change?
It does not tell us how much utility Ben get