Question

ECONOMICS QUESTION! Suppose that the price of wheat falls from $3 to $2 per bushel and that, as a result, the gross income of farmers changes from $16 billion to $14 billion. From this information, what can you determine about the market for wheat?

Answer 1

When the price is $3 (P), gross income is $16 billion, so quantity of wheat sold, Q= 16/3 = 5.33 billion.
When the price is $2 (P'), gross income is $14 billion, so quantity of wheat sold, Q'= 14/2 = 7 billion.

Thus we observe that as price decreases, quantity demanded increases. So wheat is a normal good as it follows the law of demand. Now, we find the price elasticity of demand for wheat to determine its nature.

Price elasticity of demand for wheat, ep = percentage change in quantity demanded/percentage change in price
So, ep = [(Q'-Q)/Q]*100/[(P'-P)/P]*100 = [(7-5.33)5.33]*100/[(2-3)/3]*100 = (1.67/5.33)/(-1/3) = (-)(1.67)*(3)/(5.33)
ep= 0.94 (taking the absolute value)
As elasticity is less than 1 so it implies that wheat is a necessity.