experts predict prices of peanut butter will increase 30% elasticity of deamnd f
ID: 1172982 • Letter: E
Question
experts predict prices of peanut butter will increase 30%
elasticity of deamnd for peanut butter is negative .6
elasticity of supply for peanu butter is .4
what will happen to equilibrium quantity od peanut butter traded in the market after the 30% increase in the price of peanut butter? stay the same, increase, decrease, or not enough information to tell?
what will be the expected change in the quantity of peanut butter traded in the market?
A 12, 18, or 80% decrease, or 75% increase
what will happen to the total revenue of US peanut butter producers?
stay the same, decrease, increase, or not enough information to tell?
Explanation / Answer
ELASTICITY OF DEMAND= % CHANGE IN QUANTITY DEMANDED / % CHANGE IN PRICE.
.6 = % CHANGE IN QUANTITY DEMANDED / 30%
% CHANGE IN QUANTITY DEMANDED=30* .6=18%.
ELASTICITY OF SUPPLY = % CHANGE IN QUANTITY SUPPLIED / % CHANGE IN PRICE.
.4= % CHANGE IN QUANTITY SUPPLIED / 30%
% CHANGE IN QUANTITY SUPPLIED=30* .4 = 12%
QUANTITY DEMANDED WILL DECREASE BY 18%
QUANTITY SUPPLY WILL INCREASE BY 12%
IN THIS CASE WHEN DECREASE IN DEMAND IS GREATER THEAN INCREASE IN SUPPLY EQUILIBRIUM QUANTITY AND EQUILIBRIUM PRICE BOTH WILL DECREASE EVENTUALLY.
DUE TO THE ABOVE RESULT, TOTAL REVENUE WILL DECREASE.
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