Suppose that the demand for wheat (measured in bushels) is given by: Qw = 90 –...
Suppose that the demand for wheat (measured in bushels) is given by:
Qw = 90 – 8Pw
where Qw is the number of bushels demanded and Pw is the price per bushel.
(a) This year’s harvest is 10 million bushels. Calculate the price elasticity of demand at that point.
(b) If next year’s harvest were to fall below 10 million bushels, would the revenues received by wheat farmers increase or decrease?
Homework Answers
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Ans:
a.
Price at quantity of 10 million bushels = (90 - 10) / 8 = 10.
At harvest of 10 million bushels, price elasticity of demand is:
b.
Revenue = PQ
Elasticity = -8
Fall in Q implies rise in price level.
1% rise in price causes 8% decline in Q bringing revenue(PQ) down.
Hence, revenues will fall.
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