Discussion:
1. In the United States, 2007 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded.
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2006
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2007
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Quantity demand (bushels)
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2.2 billion
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2.0 billion
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Average price (per bushel)
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$3.42
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$4.26
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a. Using the midpoint method, calculate the price elasticity of demand for winter wheat.
b. What is the total revenue for U.S. wheat farmers in 2006 and 2007?
c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a?
2. A recent study determined the following elasticities for Volkswagen Beetles:
Price elasticity of demand = 2
Income elasticity of demand = 1.5
The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.
a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.
b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.