A subsidy to wheat farmers decreases the price of a bushel of wheat from $2.50 to $2 per bushel. Prior to the subsidy, the equilibrium quantity of wheat sold was equal to 200,000 bushels. If the demand for wheat is known to be unit elastic, then after the imposition of the subsidy, _____ bushels of wheat would be sold in the market.
A)100,000
B)200,000
C)240,000
D)400,000
E)300,000

Question

Quizplus · Accepted Answer

A unit elastic demand means that the percentage change in quantity demanded is equal to the percentage change in price. With the price decreasing from $2.50 to $2, that is a 20% decrease in price. Therefore, the quantity demanded will increase by 20%, which takes us from 200,000 bushels to 240,000 bushels.

A Subsidy to Wheat Farmers Decreases the Price of a Bushel