Question

1. Suppose the price elasticity of demand for farm products is inelastic and the federal government wants to follow a policy of increasing income for farmers.

To accomplish this goal, the government will promote the programs that.........(increase or decrease) the price of farm products, knowing that the percentage change in price will be......…...(exactly the same as, Greater than, or smaller than) the percentage........(increase or Decrease) in quantity.

2.

Suppose the price elasticity of demand for used cars is estimated to be 3.

In this scenario, if the price of used cars rises by 10%, the quantity demanded of used cars will ….....(decrease or decrease)    by...…….%. Therefore, demand for used cars is (elastic or inelastic) , and the total revenue will:

Decrease

Increase

Not change

3.

Study Questions and Problems #1

True or False: If the price of a good or service increases and the total revenue received by the seller declines, the demand for this good over this segment of the demand curve is inelastic.

False

True

Answer 1

1. To accomplish this goal, the government will promote the programs that INCREASE the price of farm products, knowing that the percentage change in price will be GREATER THAN the percentage DECREASE in quantity.

EXPLANATION

INCREASE in price of farm products will not affect the quantity demanded of the farm products because it is given in the question that the demand of farm products are considered to be inelastic which means that there will be a less or no change in quantity demanded even if there is a large change in price of the commodity. Therefore, for accomplishing the goal of increasing the income of farmers, the government will INCREASE the price of the farm products.

GREATER THAN : According to the definition of INELASTIC DEMAND, percentage change in demand is less than the percentage change in price. So, in this case also change in quantity will be less than the change in price of the farm products.

DECREASE : There is DECREASE in quantity due to increase in price (Law of Demand).

2. Suppose the price elasticity of demand for used cars is estimated to be 3.

In this scenario, if the price of used cars rises by 10%, the quantity demanded of used cars will DECREASE by 30%. Therefore, demand for used cars is ELASTIC, and the total revenue will: DECREASE

EXPLANATION

DECREASE BY 30% :

ELASTIC DEMAND : Since, there is a 30% decrease in the quantity demanded of used cars due to only a 10% increase in price, therefore, the demand is called ELASTIC. In other words, the percentage change in quantity demanded is more than the percentage change in the price of the used cars.

DECREASE IN TOTAL REVENUE : We know that,

Total Revenue = Price x Quantity

So, in this case, price will increase by 10% and quantity demanded will decrease by 30%, which means that the quantity demanded is decreasing more than the increase in price of the commodity which ultimately will result in DECREASE in the Total Revenue.

3. True or False: If the price of a good or service increases and the total revenue received by the seller declines, the demand for this good over this segment of the demand curve is inelastic.

The answer is FALSE. It is because, we know that, TR = P x Q => Q = TR/ P.

So, if we assume that there is increase in price only then because of increase in denominator the quantity will decrease.

If we assume that there is decrease in numerator only i.e. in total revenue only then the quantity will decrease again.

And, if price will increase and total revenue will decrease simultaneously then ultimately the quantity will decrease with a large amount which proves that the demand will be ELASTIC.