Economics Asked by songun on April 6, 2021
I’m currently taking undergrad microeconomics and came across the following question:
The current price floor in the agricultural lettuce market makes it such that price of lettuce is 25% higher than equilibrium price and 100 heads of lettuce are demanded. Assuming that the elasticity of demand for lettuce is -0.50, what would be the equilibrium price and quantity of lettuce if the government removed the current price floor?
Here’s how I’ve tried to solve the question: https://imgur.com/gallery/blUjgcu .
The answer is
but I don’t know how to solve that.
Thanks
Price elasticity of demand of $-0.5$ means that if price increases by $1%$ demand decreases by $0.5%$ (and vice versa in case of decrease).
Consequently, if the equilibrium quantity with floor is $100$ and the price of lettuce is $25%$ that means that eliminating the price flow - which will offset the $25%$ will increase the quantity demanded by:
$$0.5cdot25% = 12.5%$$
$12.5%$ increase from $100$ is $112.5$ so that will be new quantity.
Regarding the price you don't mention what the price at the price floor originally was but it should decrease by $25%$ from its original value.
Answered by 1muflon1 on April 6, 2021
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