Suppose bad weather decreases the wheat harvest by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop failure benefit or harm wheat farmers?

What will be an ideal response?


When the price elasticity of demand is 0.6, a 12 percent decrease in quantity brings about a 20 percent increase in the price. Wheat farmers' total revenue increases because the demand is inelastic. So, taken as a group, wheat farmers' total revenue increases. However, the benefit is distributed unequally. Those farmers whose crop was destroyed because of the bad weather are harmed, whereas those farmers whose crop was spared the bad weather benefited.

Economics

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