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?

Question

Quizplus · Accepted Answer

We can use the formula for price elasticity of demand to calculate the change in quantity demanded when the price changes:

%ΔQd = (%ΔP) * (elasticity of demand)

Since we know that the elasticity of demand for lettuce is -0.50, and the price is currently 25% higher than the equilibrium price, we can plug in these values to solve for the percentage change in quantity demanded:

%ΔQd = (-0.50) * (-0.25) = 0.125

This tells us that if the price of lettuce were to decrease by 25%, the quantity demanded would increase by 12.5%.

To find the equilibrium price and quantity, we need to find the price and quantity at which the quantity demanded equals the quantity supplied:

100 + 0.125Q = Q

0.875Q = 100

Q = 114.28

So at the equilibrium price and quantity, 114.28 heads of lettuce will be demanded and supplied. To find the price, we can plug this quantity back into the demand equation:

100 + 0.125(114.28) = 114.28

Price = $0.75

Therefore, if the government were to remove the price floor, the equilibrium price of lettuce would be $0.75 and the equilibrium quantity would be 112.5 (rounded down to the nearest integer).

The Current Price Floor in the Agricultural Lettuce Market Makes