2. In the United States, 2007 was a bad year for growing wheat. And as wheat sup

Question

2. In the United States, 2007 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2006 2007 Quantity demand (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 2006 and 2007? c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a? 3. A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.

Explanation / Answer

A. True The price elasticity of the demand is 2. There is 1% increase in the price which would reduce the quantity demand by 2%. Therefore a 10% increase in the price would reduce the quantity demanded by 20%.

B. The second statement part is true. An increase in income would increase the demand for Beetles being sold and therefore increase the demand. However this is a normal good because it is elastic and since the income increased and the price elasticity of demand is greater than 1 the revenue will go up not down. Because the demand has increased and the quanity has increased. This statement is false.

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