Question

4/12 Content attribution Question 5 If the magnitude of the elasticity of demand is less than 1 at the current price and the price of a major input to production falls will reap more of the benefit than ine Select the correct answer below: O producers; consumers vey consumers; producers producers; suppliers none of the above BFEEDBACK Content attribution Question 6 Next Previous

Answer 1

Solution:

If the magnitude of the elasticity of demand is less than 1 at current price, it means that the market is operating on the inelastic part of the demand curve. In this part then, quantity demanded of a good changes only slightly when price of a good change. When the price of a major input to production falls, it will lead to a downward shift in the supply curve. In other words, now that cost of production for a good has reduced, its price will also reduce (so a particular quantity level shall be supplied at a lower price now). Demand being inelastic, such reduced price will not result in significant increase in quantity demanded, only slight increase might be witnessed. It seems pretty evident that consumers shall benefit more from such price reduction than the producers as for producers price has reduced and quantity demanded hasn't increased much, while consumers for the same quantity level will have to pay a very low price now.

Thus, correct option is (b) consumers, producers.