The price elasticity of demand for a certain agricultural product is constant (o

Question

The price elasticity of demand for a certain agricultural product is constant (over the relevant range of prices) and equal to 1.50. The supply elasticity for this product is constant and equal to 4. Originally the equilibrium price of this good was $15 per unit. Then it was discovered that consumption of this product was unhealthy. The quantity that would be demanded at any price fell by 11%. The percent change in the long-run equilibrium consumption of this good was

answer.         -8%.

HOW TO SOLVE?

Explanation / Answer

Since the elasticity of excess demand=4-(-1.5)=5.5

At initial equilibrium price there is excess supply of 11%. Thus a 2% reduction in price will make new equilibrium.

Thus a 2% decrease in price will increase demand by 3% because Ed=-1.5

Thus net effect is -11% +3%=-8%

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