Drought cuts the quantity of wheat grown by 2 percent. If the price elasticity o
ID: 1218144 • Letter: D
Question
Drought cuts the quantity of wheat grown by 2 percent. If the price elasticity of demand for wheat is 0.5, by how much will the price of wheat rise? If pasta makers estimate that this change in the price of wheat will increase the price of pasta by 25 percent and decrease the quantity demanded of pasta by 8 percent, what is the pasta makers' estimate of the price elasticity of demand for pasta? If pasta sauce makers estimate that, with the change in the price of pasta, the quantity of pasta sauce demanded will decrease by 5 percent, what is the pasta sauce makers' estimate of the cross elasticity of demand for pasta sauce with respect to the price of pasta?Explanation / Answer
Wheat:
PED = % change in quantity / % change in price
0.5 = -0.02 / % change in price
0.5*% change in price = -0.02
% change in price = -0.02 / 0.5 = -0.04
% change in price = -(4%)
Price of wheat reduces by 4%.
Pasta:
PED of pasta = -0.08 / 0.25
PED of pasta = -(0.32)
Cross elasticity of pasta sauce:
XED = % change in quantity of pasta sauce / % change in price of pasta
XED = -0.05 / 0.25 = -(0.2)
XED = 20%.
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