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# hwork2key - Homework 2 Name_KEY 1 10 pts"A good harvest...

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1 Homework 2. Name _________KEY_________________________ 1) 10 pts . "A good harvest will generally lower the income of farmers." Justify this seemingly contradictory statement using supply and demand graphs and the concept of elasticity.. 2) 10 pts total. 5 points each. a) Find the elasticity of demand between these two points: Point 1: Price = \$8, Quantity = 220. Point 2: Price = \$12, Quantity = 180. ____20%/40% = 0.5__________ b) Find the elasticity of supply between these two points: Point 1: Price = \$7, Quantity = 75. Point 2: Price = \$9, Quantity = 125. ___50%/25% = 2___________ Justification : If farmers produce basic commodities, the demand for their product will probably be inelastic. When supply increases from the good harvest, TR will fall because price falls more than enough to off-set the gain in yields. Some points subtracted for incomplete answers.

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2 3) 11 pts total . Assume that the elasticity of demand for chicken is 3.00. (Elastic demand example.) a) If supply increases to the point where the equilibrium quantity goes up by 10%, by what percentage will chicken price change? Be sure to say if it rises or falls.(5pt) 3.0 = 10%/X X = 3.33% Price will fall by 3.33%. (3 pts off for incorrect number, 2 pts off for incorrect direction) b) Graph the supply shift and explain what happens to total revenue (increase, decrease or no change). (6 pts.) P S S' D Q 4) 11 pts total . Assume that the elasticity of demand for bread is 0.5 (Inelastic demand example.)
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