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14 August, 19:57

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?

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  1. 14 August, 21:29
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    demand will fall by 10%

    and revenue increase by 8%

    Explanation:

    the price elasticity is the relationship between the quantity demanded and the change in price:

    demandQ / ΔPrice = price-elasticity

    demandQ / 20% = 0.5

    Qd = 20% x 0.5 = 10% the demand will fall by 10%

    Now, we can determinate the revenue:

    QXP = TR

    Qx1 = 1Q

    after the price increase:

    (1 - 0.1) Q x 1.2 = 0.9 x 1.2Q = 1.08Q

    1.08Q > 1Q the total revenue should increase.
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