True and False
If an increase in the price of Arnott’s biscuits from $2 to $2.50 a packet causes quantity demanded to decrease from 8,500 to 7,500 packets a day, the demand for Arnott’s biscuits within this price range is price inelastic.
If the demand for Flora margarine is price elastic, its manufacturer should raise the price to increase its total revenue.
If the demand for potatoes is price inelastic, a bumper crop of potatoes will result in a lower total revenue for potato farmers taken as a group
The most likely effect of a global drought would be to lower farm incomes.
If a 5 per cent increase in the price of wine leads to a 7 per cent increase in quantity supplied, we can infer that the supply of wine is elastic.
Multiple Choice
All else being equal, the price elasticity of demand tends to be higher:
The more substitutes there are for the good or service
The shorter the time period involved
The more consumers perceive the good to be a necessity
The less important the product is in consumers budgets
As income rises during economic upturns, consumption of potatoes declines, yet as income falls during economic downturns, consumption of potatoes rises. The most likely explanation is:
Negative income elasticity of demand
Very low price elasticity of demand
Very high price elasticity of supply
High income elasticity of demand
The demand for food is generally:
Income inelastic and price elastic
Income elastic and price inelastic
Both income and price elastic
Both income and price inelastic
Price elasticity of supply tends to be higher:
The longer the time period
The more adaptable the firms can be to changing market conditions
For manufactured goods than for antiques
For all of the above
If an officer of the Australian Wool Corporation argues that a decrease in the wool price will lead to a lower revenue from wool sales, he or she must believe that the demand for wool within the current price range is:
Elastic
Inelastic
Unit elastic
Perfectly elastic
Explain why high-income households will tend to have lower price elasticities of demand for food compared with low-income households, all other things being equal.
You are the managing director of Nestle Australia Ltd, and you are wondering whether or not to cut the price of Milo food drink to increase your total revenue from Milo sales. Explain how knowledge of the elasticity of demand for Milo can help you to decide whether or not to cut your price.
Explain the effect of a worldwide drought have on total revenue of grain farmers (assuming demand for grain is price inelastic). Why? What would be the effect on total revenue on grain farmers in Victoria if the drought is only in Victoria?
The government has decided that the free-market price of milk is too low.
Suppose the government imposes a binding price floor in the milk market. Use a supply-and-demand diagram to show the effect of this policy on the price of milk and the quantity of milk sold. Is there a shortage or surplus of milk?
Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
In response to farmers’ complaints, the government agrees to purchase all of the surplus milk at the price floor. Compared with the basic price floor, who benefits from this new policy? Who loses?
15. A local agribusiness enterprise has employed a consultant to estimate its supply curve for a new hybrid corn seed and to estimate the demand faced for this seed in its local marketplace. The consultant has determined the following:
Demand: Q = 890 – P
Supply: Q = 50 + 3P
a. Given these two estimates, solve for the market equilibrium price and quantity
b. Now plot the individual supply and demand curves together for price levels from $50 through $600 in increments of $50 (i.e. $50, $100, $150 etc). Is the market equilibrium the same on your graph as calculated in Question 1?
c. Given the demand price-quantity relationships, calculate the elasticity of demand when:
Prices increase from $150 to $200
Prices increase from $550 to $600