The current price floor in the agricultural lettuce market makes it such that the price of lettuce is 25% higher than the equilibrium price and that 100 heads of lettuce are demanded.Assuming that the elasticity of demand for lettuce is -0.50,how much would revenue (P ∗ Q)change for the lettuce company if the government removed the current price floor?
A) Revenue will increase by $15.60.
B) Revenue will decrease by $15.60.
C) Revenue will increase by $40.60.
D) Revenue will increase by $ 9.40.

Question

Quizplus · Accepted Answer

If the price of lettuce is currently 25% higher than the equilibrium price and the elasticity of demand is -0.50, then removing the price floor would result in a 12.5% decrease in price [(1-0.25)/1 = 0.75; (0.75^0.50)x100 = 86.6]. This means that the new price would be 86.6% of the previous price.

Using the midpoint formula, the new quantity demanded would be: 
[($1.00-$0.75)/(($1.00+$0.75)/2)] x (100) = 33.3 heads of lettuce

Therefore, the revenue (P x Q) for the lettuce company would change from $100 to $75 if the price floor were removed. This represents a decrease in revenue of $25, or $15.60 (rounded to the nearest cent) after subtracting the original revenue from the new revenue. Thus, the correct choice is B.

The Current Price Floor in the Agricultural Lettuce Market Makes