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Chapter 3: Q17PA (page 118)

As newly appointed “Energy Czar,” your goal is to reduce the total demand for residential heating fuel in your state. You must choose one of three legislative proposals designed to accomplish this goal: (a) a tax that would effectively increase the price of residential heating fuel by \(1; (b) a subsidy that would effectively reduce the price of natural gas by\)3; or (c) a tax that would effectively increase the price of electricity (produced by hydroelectric facilities) by$4 . To assist you in your decision, an economist in your office has estimated the demand for residential heating fuel using a linear demand specification. The regression results are presented on page 119. Based on this information, which proposal would you favor? Explain.

Short Answer

Expert verified

The subsidy effectively reducing the price of natural gas by3% would be the preferable proposal to reach the goal.

Step by step solution

01

Preferred proposal

The best legislative proposal to reduce the total demand for residential fuel heating would be –a subsidy that would effectively reduce the price of natural gas by3% . Based on the regression results, and as a newly appointed "Energy Czar", this decision is made.

02

Analyzing through data

Based on the regression results, this reduction in price will minimize the demand for residential heating fuel by 31.64 units. Moreover, the coefficient is positive which is 43.88 for the price of natural gas.Hence, has a positive impact on decreasing the demand for the commodity due to an increase in the price. Whereas, the other two proposals showed a negative coefficient of -91.69 and -11.92 which represents a negative outcome with an increase in price rise. Hence, the proposal of subsidy showed a great impact on the reduction of residential heating.

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Most popular questions from this chapter

A quant jock from your firm used a linear demand specification to estimate the demand for its product and sent you a hard copy of the results. Unfortunately, some entries are missing because the toner was low in her printer. Use the information presented below to find the missing values labelled ‘1throughrole="math" localid="1657353618073" 7’ (round your answer to the nearest hundredth). Then, answer the accompanying questions.

a. Based on these estimates, write an equation that summarizes the demand for the firm’s product.

b. Which regression coefficients are statistically significant at the5percent level?

c. Comment on how well the regression line fits the data.

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a. The price of good Xdecreases by 5 percent.

b. The price of good Y increases by 8 percent.

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lnQxd=7-1.5lnPx+2lnPy-0.5lnM+lnA

where Px=\(15;Py=\)6;M=40,000andA=350.

a. Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary elastic.

b. Determine the cross-price elasticity of demand between good X and good Y, and state whether these two goods are substitutes or complements.

c. Determine the income elasticity of demand, and state whether good X is a normal or inferior good.

d. Determine the own advertising elasticity of demand

A few years ago, the Federal Communications Commission (FCC) eliminated a rule that required Baby Bells to provide rivals access and discounted rates to current broadband facilities and other networks they may build in the future. Providers of digital subscriber lines (DSL) that use the local phone loop are particularly affected. Some argue that the agreement will likely raise many DSL providers’ costs and reduce competition. Providers of high-speed Internet services utilizing cable, satellite, or wireless technologies will not be directly affected, since such providers are not bound by the same facilities-sharing requirements as firms using the local phone networks. In light of the FCC ruling, suppose that News Corp., which controls the United States’ largest satellite-to-TV broadcaster, is contemplating launching a Space way satellite that could provide highspeed Internet service. Prior to launching the Space way satellite, suppose that News Corp. used least squares to estimate the regression line of demand for satellite Internet services. The best-fitting results indicate that demand is Qsatd=152.5-.8Psat+1.2PDSL+.5Pcable\((inthousands)cable (in thousands), where Psatis the price of satellite Internet service, PDSLis the price of DSL Internet service, and Pcableis the price of high-speed cable Internet service. Suppose that after the FCC’s ruling the price of DSL, PDSL, is \)25per month and the monthly price of high-speed cable Internet, Pcable, is \(50Furthermore, News Corp. has identified that its monthly revenues need to be at least \)15million to cover its monthly costs. If News Corp. set its monthly subscription price for satellite Internet service at $55, would its revenue be sufficiently high to cover its cost? Is it possible for News Corp. to cover its cost given the current demand function? Justify your answer.

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