If a utility company were considering an increase in electricity or gas prices in order to cover the costs of a capital investment, which sector would result in the smallest change in quantity demanded in the long run and thus higher profits. True or false?

Question:

If an utility company were considering an increase in electricity or gas prices in order to cover the costs of a capital investment, this sector would result in the smallest change in quantity demanded in the long run and thus higher profits. True or false?

The answer is True.

Explanation:

Change in the demand for gasoline and or electricity is primarily set by the number of industrial or bulk users.

Scarce goods are allocated though the help of prices. It is important to note that demand for gasoline or electricity is more elastic in the long term, so small changes in price will alter supply and demand in either direction in the shortrun.

The demand for gas or electricity are by nature inelastic. This means that when prices go up, demand goes down but not by much.

It means that in the short term, the individuals cannot alter their lifestyle immediately to adjust for the hike in prices.

To adjust they would have to probably purchase new devices which or cars which consume less gas or electricity.

The effect this has for the company on the overall is that they are able to achieve their aim of recouping their capital investments from the planned increase in price.

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