Question 7:

In Question 5 (and potentially in Question 6), your analysis considered

a price ceiling at a price lower than the final market equilibrium price

(P₂) determined in Question 3. For this question, assume that

government policymakers in some U.S. states and several European

countries, aware of the higher prices as shown in Question 3, have

agreed to subsidize consumers to protect them from the rapid growth

in energy costs.

Energy markets, such as the market for natural gas and electricity,

have been known to be characterized by inelastic demand. However,

recent research discussed in the August 25, 2022 issue of The

Economist, indicates that while the responsiveness of quantity

demanded in response to price changes indeed is "inelastic" (i.e., the

absolute value of price elasticity of demand is still less than 1), the

percentage change in quantity demanded in response to a change in

price is much larger than earlier research indicated.

Answer these narrative questions. No graphs are needed.

• What does "inelastic demand" formally mean? In addressing this

part of the question, please make sure to explain the concept of

the price elasticity of demand using a simple formula and by

providing a short narrative.

• Policymakers are encouraging people to conserve energy in

response to the growing energy crisis. Discuss the positives

(pros) and negatives (cons) of providing subsidies to consumers

in this situation by contrasting subsidies to other potential

approaches (such as price ceilings and energy blackouts).