Question

Your job is to predict the total revenue generated by the nation’s corn crop. Last year’s...

Your job is to predict the total revenue generated by the nation’s corn crop. Last year’s
corn crop was 100 million bushels. and the price was $5/bushel. This year’s weather was
very good and the crop is 110 million bushels. The price elasticity of demand is 0.50. A
a. Assume the entire corn crop is sold every year, what is your prediction for corn prices
this year?

b. Predict the total revenue from the sale of corn this year.
c. Did the the good weather increase or decrease revenues? Explain in words and with a
graph.

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Answer #2

a) Price Elasticity of demand = Percentage change in Q/Percentage change in P

When the quantity increases by 10% and the price elasticity is 0.50,then  

Percentage change in price = 10%/0.5 = 20% so the price will decline by 20% from $5/bushel to $5(1-.2) = $4 per bushel

b) Total revenue = Price x Quantity

Revenue will decline from 100x5 = $500 million to 110x4 = $440 million

c) The good weather will decrease the revenue as the agriculture prices are inelastic so an increase in supply due to good weather will decrease the price and offset the increase in revenue so the price effect is greater than quantity effect.As the supply curve shifts to the right,the increase in supply will create a downward pressure on the price and it decreases to $4 resulting in decrease in total revenue for the farmers.

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