6.1 Elasticity of Demand Question Triday, April 22 20 Canadian wheat production
ID: 1141810 • Letter: 6
Question
6.1 Elasticity of Demand Question Triday, April 22 20 Canadian wheat production increased dramatically after a 'bumper crop (i.e. a larger than normal crop). This caused the price of wheat to fall and the quantity demanded of wheat to increase. Figure 1 below shows the data for Canadian demand for wheat. a)Calculate the price elasticity of demand for wheat using the mid-point method. What kind of elasticity do Canadian consumers have for wheat? Why? b) What is the total revenue/income for Canadian wheat farmers before and after the bumper crop? Did it increase or decrease? Why? Figure 1: Canadian Demand for Wheat Bushels Produced (Millions) Avg. Price per Bushel ($) Normal Crop Bumper Crop 401,900 2.72 1,740 3.70Explanation / Answer
ANSWER:
A) change in price is from $3.70 per bushel to $2.72 per bushel.
change in quanity is from 1,740 to 1,900
price elasticity of demand = (3.70 - 2.72) / (3.70 + 2.72 ) / 2 / ( 1900 - 1740) / (1900 + 1740) / 2
ped = 0.98 / 3.21 / 160 / 1820
ped = 0.3052 / 0.0879
ped = 3.47
demand is elastic as it is greater then 1.
b) total revenue for farmers before bumper crop = average price per bushel in normal crop * bushels produced in normal crop = $3.7 * 1740 = $6,438 million
total revenue for farmers after bumper crop = average price per bushel in bumper crop * bushels produced in bumper crop = $2.72 * 1900 = $5,168 million
total revenue decreased after bumper crop as the average per bushel decreased compared to rise in production.
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