Question

Two economists from Ohio University estimated that the demand curve for kerosene in Indonesia was such that a 10 percent increase in the price reduced the quantity demanded by 2.2 percent and that a 10 percent increase in the price of electricity increased the demand for kerosene by 1.6 percent. This indicates that (i) the demand for kerosene is price inelastic and (ii) kerosene and electricity are substitutes. Which of these two statements is correct?
a. i not ii
b. ii not i
c. i and ii
d. neither i nor ii

Answer 1

Answer:

C) i and ii

Explanation:

Price elastic of demand (PED) of kerosene = 2.2% / 10% = 0.22 price inelastic demand

When two products are substitutes, an increase in the price of one of the products will not only reduce the quantity demanded of that product, but it will also increase the quantity demanded of its substitute products. In this case, an increase in the price of electricity, increases the quantity demanded for kerosene, which means that they are both substitute products.