Question

Question 2 (3 points) Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply. You must provide a graph and explain why you think this is the case. Keep in mind 1) the elasticity of the demand curve 2) how the drought affects the supply. Please make sure to label all parts of the graph. Question 3 (2 points) Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, cal- culate Sheila's income elasticity for shoes, and comment on what type of goods she considers these shoes to be.

Answer 1

Question 2 the demand for bue ing that the market for barley is in equilibrium and demand for barley is in elastic lic. the absolake value of the elasticity of demand in Edl 22. Hence the demand enue will be steepu than the supply couc. Now, it a prolonged drought reduces the supply hence the Cupply care will shift legt wad from si to Sz and as the econory move from point A to point B, and the equilibuum Price of barley will increase by a large amont from pl to P2 • P2 and and quantity quantity denso demon so sold will decline by only a smaller amont from Qi to Q2 1 Sa Psi - ha Scanned with CamScanner Q Qi

Question 3 Initial income M, = $40,000 Initial quantity demanded Q1 = 6 pains New demand income M2 = $50,000 New quantity demanded Q₂ = 10 pairs. Now in come elasticity of demand! % change in quantity demanded % change in in core EM . Now, % change in quantity demanded? (Q2-QI) x 160 Q1+Q2) 2 (0-6)_X100 = 50 = 710762 and % change in income = (M2-M12 x 100 (mit M2) 2 +(50,000-40,000x100 (50,00 +49000) = 22.2 50 22:2 = 2.2570 Huce the income elasticity of demand (EM) = as, Eu increasu in nea is 2.25 which is greatu than Eno, hence as income imand for shores in weases, hence shoes are normal? goods. į 2. 25 whi demand for shose's Scanned with CamScanner