Question

1. Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per bushel. Also assume that the price elasticity of corn is 0.10, while the price elasticity of wheat is 0.15 Both have an income elasticity of 0.10. If the price of corn fell by 25 percent to $3 per bushel, by what percentage would the quantity demanded of corn increase? What if the price of wheat fell by 33 percent to $2 per bushel? a. If the average income in the economy increases by 2 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant? Holding all other factors constant, if 10 billion bushels of wheat are demanded this year, by how many bushels would the quantity demanded increase in 30 years if incomes rise by 2 percent each and year and the income elasticity remains at 0.10? (Hint: the growth over t number of years at an annual growth rate of g is equal to (1 + g)-1. In this case g -0.02). Comment on the long-run viability of the wheat industry under these conditions. Will growing demand have to come from global population growth (rather than growth in per capita income) to sustain long-run growth in wheat production? b.