Scribd
Upload
60 views1 page

Assignment 1 MIDTERM

1. The relationship between price elasticity and total revenue depends on whether demand is elastic, inelastic, or unit elastic. Elastic demand means a price increase reduces revenue, while inelastic demand means a price increase raises revenue. 2. The price elasticity of supply is generally more elastic in the long run than the short run. In the long run, all production factors can adjust to an increase in supply, while in the short run only labor can adjust. 3. A drought that destroys half of all crops could increase farmers' profits if it reduces supply while demand remains the same, raising prices. However, individual farmers destroying their own crops would not benefit them without industry-wide coordination.

Uploaded by

Rye Felimon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
60 views1 page

Assignment 1 MIDTERM

1. The relationship between price elasticity and total revenue depends on whether demand is elastic, inelastic, or unit elastic. Elastic demand means a price increase reduces revenue, while inelastic demand means a price increase raises revenue. 2. The price elasticity of supply is generally more elastic in the long run than the short run. In the long run, all production factors can adjust to an increase in supply, while in the short run only labor can adjust. 3. A drought that destroys half of all crops could increase farmers' profits if it reduces supply while demand remains the same, raising prices. However, individual farmers destroying their own crops would not benefit them without industry-wide coordination.

Uploaded by

Rye Felimon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

Assignment #1 midterm

1. Explain the relationship between total revenue and price elasticity of demand.

The relationship between price elasticity and total revenue is dependent upon whether the
demand for a good or service has a price elasticity that is elastic, inelastic or unit elastic when
the price is either increased or decreased. If the demand is elastic, an increase in cost will
decrease aggregate returns. If the demand is inelastic, an increase in cost will increase
aggregate returns. If the demand is unit elastic, an increase in price does not affect return.
Elasticity has an important relationship with revenue, from what I can see, it seems that change
in price of an item, changes the quantity demanded by consumers, and depending on how the
numbers play out in the changes, whether the percentage in quantity demanded or rise in price
is larger, will tell you whether your total revenue would decrease or increase.

2. Explain why the price elasticity of supply might be different in the long run than in the
short run.

The more time a producer has to respond to price changes the more elastic the supply. Supply
is normally more elastic in the long run than in the short run for produced goods, since it is
generally assumed that in the long run all factors of production can be utilized to increase
supply, whereas in the short run only labor can be increased, and even then, changes may be
prohibitively costly.

3. How might a drought that destroys half of all farm crops be good for farmers? If such a
drought is good for farmers, why don’t farmers destroy their own crops in the absence of
a drought?

Assuming that such a drought does not completely wipe out all crops, such a scenario would
result in a decrease in the supply of crops. The demand however is inelastic and remains the
same. Since demand is higher than supply it would result in an increase in the price of crops for
the buyer. The farmer may make a profit if (low price x high quantity) is lesser than (high price x
low quantity). This works only if it affects all farmers. If all of them collectively decide to destroy
their crops then it might be beneficial, however a single farmer destroying his crops would lead
to no profits.

You might also like