Suppose bad weather decreases the quantity of wheat 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 decrease 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 since the demand is inelastic because, with inelastic demand and 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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