Due to a drought in Georgia, the market price for peanuts rises by 20% nationwide. If the price elasticity of demand for peanuts is 0.8, what would happen to total revenue for peanut farmers who were not affected by the drought?
A) Total revenue would fall as quantity demanded falls by 16%.
B) Total revenue would rise as quantity demanded falls by 16%.
C) Total revenue would fall as quantity demanded falls by 25%.
D) Total revenue would rise as quantity demanded falls by 25%.

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is % change in quantity demanded / % change in price. Given a 20% increase in price and an elasticity of 0.8, the quantity demanded would fall by 16% (0.8 * 20%). However, because the price increase is larger in percentage terms than the fall in quantity demanded, total revenue (price * quantity) for peanut farmers not affected by the drought would rise.

Due to a Drought in Georgia, the Market Price for Peanuts