A group of dairy farmers is trying to raise milk prices by 10%.If the price elasticity of demand for milk is 0.75 and the price elasticity of supply for milk is 0,by how much should farmers reduce their milk production to obtain the 10% increase?
A)10%
B)7.5%
C)15%
D)13%

Question

Quizplus · Accepted Answer

Since the price elasticity of supply for milk is 0 (perfectly inelastic), the quantity supplied will not change based on the change in price. Therefore, in order to obtain the 10% increase in prices, the demand must decrease by 10/0.75 = 13.33%. To achieve this decrease in demand, farmers should reduce their milk production by 7.5% (which is 13.33% of the original quantity produced) in order to increase the price by 10%.

A Group of Dairy Farmers Is Trying to Raise Milk