Question

1. Milk has an inelastic demand and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent, thus decreasing the supply of cattle and dairy cows.

A.Draw separate graphs for the milk market and the beef market, showing what happens to equilibrium price and quantity when the supply decreases. Keep in mind the elasiticities of the demand curve in each market.

B.Based on your answer in Part A, comment on what will happen total revenue in the milk and beef market. [Hint: the answer depends on the elasticity and the price change from Part A]

Answer 1

A) Supply decreases in both markets from S1 to S2. Milk market has inelastic demand for milk so the decline in Quantity (from Q1 to Q2) is proportionately smaller than the rise in Price (from P1 to P2). Beef market has elastic demand for beef so the decline in Quantity (from Q1 to Q2) is proportionately greater than the rise in Price (from P1 to P2).

B) Total revenue in milk market will increase because demand is inelastic and price increase will result in increasing revenue. Total revenue in beef market will decrease because demand is elastic and price increase will result in decreasing revenue.