Question

3. What factors determine the elasticity of resource demand? What effect will each of the following have on the elasticity or the location of the demand for resource C, which is being used to produce commodity X? Where there is any uncertainty as to the outcome, specify the causes of that uncertainty. LO16.4

a. An increase in the demand for product X.

b. An increase in the price of substitute resource D.

c. An increase in the number of resources substitutable for C in producing X.

d. A technological improvement in the capital equipment with which resource C is combined.

e. A fall in the price of complementary resource E.

f. A decline in the elasticity of demand for product X due to a decline in the competitiveness of product market X.

Answer 1

Answer :-

Elasticity of demand for a resource is determined by:

(1) the rate of decline of MP; (2) ease of resource substi-
tutability: (3) elasticity of product demand; and (4) ratio of
resource costs to total costs.

(a) :- Increase in the demand for resource C.
(b) :- Uncertainty relative to the change in demand for resource C; answer depends upon which is larger-the substitution effect or the output effect.
(c) :- Increase in the elasticity of resource C.
(d) :- Increase in the demand for resource C.
(e) :- Increase in the demand for resource C.
(f) :- Decrease in the elasticity of resource C.

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