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Consumer Response to Utility Price Changes
A utility company announces a permanent 30% increase in the price of electricity for residential customers. Explain why the price elasticity of demand for electricity would likely be lower (more inelastic) in the first month following the price increase compared to the third year after the price increase. Your explanation must identify at least one specific adjustment a consumer could make in the long run that is not feasible in the short run.
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Social Science
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Economy
CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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True or False: Following a significant and permanent price increase for gasoline, the percentage decrease in the quantity demanded is likely to be larger in the first month after the price change than it will be two years later.
Consumer Response to Electricity Price Changes
Consumer Response to Utility Price Changes
The price of home electricity rises by 30% and is expected to stay high permanently. Which of the following statements best analyzes why the price elasticity of demand for electricity will be greater two years after the price increase compared to during the first month?
A national government imposes a new, permanent 25% tax on gasoline, causing a significant and lasting price increase. Analyze the following consumer and market reactions by matching each one to the time frame in which it is most likely to occur.
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A company that sells a patented, highly specialized medication for a chronic condition is considering a permanent 30% price increase. The medication has no direct competitors. Two executives are debating the strategy:
- Executive A argues: "Let's proceed. In the first six months, our revenue will soar. Patients depend on this medication daily and have no other immediate choice, so the quantity demanded will barely drop."
- Executive B argues: "I'm cautious. This price hike could accelerate research and development by other firms to create a substitute. Within a few years, we might face new competition that erodes our market share, or doctors may start prescribing older, less effective treatments more often."
Based on the economic principles of demand over different time horizons, which executive's reasoning best incorporates the potential long-term risks?