The price elasticity of demand for milk has been estimated to be somewhere between 0.49 and 0.63.If a new system of feeding and milking cows yields a 15% increase in the production of milk throughout the country,how will that affect total expenditures on milk,all other things equal?
A)Total expenditures will remain unchanged.
B)Total expenditures will fall.
C)Total expenditures will rise.
D)The information is insufficient to answer the question.

Question

Quizplus · Accepted Answer

If the production of milk increases by 15%, this means that the supply of milk has increased. According to the law of demand, if the price of a product remains constant, an increase in supply will lead to a decrease in total expenditure on that product. Given that the price elasticity of demand for milk is between 0.49 and 0.63, which is less than 1, we can conclude that demand is relatively inelastic. Therefore, the decrease in price resulting from the increase in supply will not be enough to stimulate a larger increase in demand to offset the increase in supply. As a result, total expenditures on milk will fall.

The Price Elasticity of Demand for Milk Has Been Estimated