6. (a) What is meant by the long-run elasticity of demand versus the short-run elasticity of demand for a commodity? Why, and how, might the long-run price elasticity of demand be different from the short-run elasticity? Would the magnitude of the difference depend on the commodity involved – give an example of a commodity where there is likely to be a small difference versus one where there is likely to be a large difference. What does the empirical evidence about the price elasticity of demand for water in the Washington DC area based on data for 1969-1974 imply about how much the short- and long-run price elasticities of demand might differ?
7. Suppose you work in SRP’s economics group and you advise SRP on rate setting.
(a) SRP will have to take a particular power plant out of service this summer for repair, which means there is a chance of supply shortage and brownouts occurring this summer. Consequently, SRP needs to reduce peak demand for electricity this summer by 7.5%. To accomplish this, it is asking you to propose am electricity price increase for this summer. For this purpose, would you use an estimate of the long-run price elasticity of demand or the short-run price elasticity of demand? Explain your reasoning?
(b) SRP is reviewing its strategic plan through 2025. It anticipates that a supply shortage will start to emerge in Arizona after 2020. It therefore needs to revise its planned rate schedules after 2020, to shrink demand. In advising SRP how to adjust its rates after 2020, would you use an estimate of the long-run price elasticity of demand or the short-run price elasticity of demand? Explain your reasoning?
From lecture on extensions of the conventional model
8. (a) What is the full cost of consuming a unit of a commodity? (b) What changes other than an increase in the price of a commodity can raise its full cost? (c) If paid employment becomes available on a large scale to women, when previously it had not been available, how and why might this affect the consumption of meals in the home versus meals consumed away from home? How and why might it affect household size (the number of children per family)?