Suppose that the demand curve for corn is given by the formula Q =100 - 2P. a) U

Question

Suppose that the demand curve for corn is given by the formula Q =100 - 2P.

a) Using the point elasticity formula, what is the price elasticity of demand for corn when the equilibrium quantity demanded in the market is 60 units? Round to the nearest two digits.

b) Suppose that irrigation technology for corn improves so that more corn can be produced from each plot of land using the same amount of labour, and labour is the only variable input in the production of corn. What do you expect will happen to the total revenue earned from sales by corn farmers in the new equilibrium compared to the old one, i.e., is it likely to increase, decrease or stay the same? Why? (Hint: Start by considering how supply and/or demand are affected.)

Explanation / Answer

a) Q = 100 - 2P. Thus we differentiate with respect to P and get:

So we substitute dQ/dP = -2 and Q = 100 - 2P into our price elasticity of demand equation:

We're interested in finding what the price elasticity is at Q = 60, so we substitute this into our price elasticity of demand equation:

b) If the production of corn increased the supply curve will be shift to right indicating more supply. The new supply curve will intersect the demand curve at low price and high quantity, which means more will be the supply the price will come down and if the price come down more will be demanded, so the quantity purchased will be increase. The new equilibrium quantity will be more compared to the old and price will be less in the new equilibrium compared to the old one.

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