The price elasticity of demand for a certain agricultural product is constant (over the relevant range of prices) and equal to -2. The supply elasticity for this product is constant and equal to 3. Originally the equilibrium price of this good was $45 per unit. Then it was discovered that consumption of this product was unhealthy. The quantity that would be demanded at any price fell by 100%. The percent change in the long-run equilibrium consumption of this good was

Question

Quizplus · Accepted Answer

With a price elasticity of demand of -2, we can use the formula:

%change in quantity demanded = (%change in price) x (price elasticity of demand)

Let's assume the new equilibrium price is P. We know that the quantity demanded at this new price is 0 (a 100% decrease in quantity demanded).

So:

-100% = (%change in price) x (-2)

%change in price = -100% / (-2) = 50%

Therefore, the new equilibrium price will be 50% lower than the original price, which is $45.

New equilibrium price = $22.50

Now, we can use the supply elasticity of 3 to find the percent change in the long-run equilibrium consumption of this good.

%change in quantity supplied = (%change in price) x (supply elasticity)

%change in quantity supplied = (-50%) x (3) = -150%

Note that this is the percent change in the quantity supplied, not the quantity demanded. Since the quantity supplied equals the quantity demanded in equilibrium, we can infer that the percent change in the long-run equilibrium consumption of this good will also be -150%, or a 60% decrease.

Therefore, the answer is D (-60%).

The Price Elasticity of Demand for a Certain Agricultural Product