Question
Many consider fossil fuel consumption to be fairly inelastic in the short run and more elastic in the longer term. In response to sharp increases
Many consider fossil fuel consumption to be fairly inelastic in the short run and more elastic in the longer term. In response to sharp increases in the price of petroleum (a) first people change their short term behavior to use less fuel, but more importantly (b) the expectation of long term price increases launched a wave of research into substitute sources of energy and their adoption by consumers. Please graphically illustrate effects (a) and (b) (10 points). Then (c) demonstrate graphically the likely effect of subsequent fossil fuel price decreases on fossil fuel demand (5 points). (d) Discuss the long-term effect of price expectation induced technological innovation and consumer preferences (5 points).
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