The accompanying chart presents data on the price of fuel oil, the quantity demanded of fuel oil, and the quantity demanded for insulation.
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Fuel Oil
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Insulation
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Price per Gallon
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Quantity Demanded (millions of gallons)
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Quantity Demanded (millions of tons)
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$3
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100
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30
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$5
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90
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35
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$7
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60
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40
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a. Calculate the price elasticity (arc elasticity) of demand for fuel oil as its price rises from 30 to 50 cents; from 50 to 70 cents. Calculate the change in total revenue in the two cases. Explain how the changes in revenue relate to your estimated elasticities.
b. Calculate the arc cross elasticity of demand for insulation as the price of fuel oil rises from 50 to 70 cents. Are fuel oil and insulation substitutes or complements? Explain.