A dairy co-op in Ontario is trying to raise milk prices by 10%.If the price elasticity of demand for milk is 0.75 and the price elasticity of supply for milk is 0,by how much should the co-op reduce their milk production to obtain the 10% increase?
A) 10%
B) 7.5%
C) 15%
D) 13%

Question

Quizplus · Accepted Answer

Since the price elasticity of supply is 0, the percentage change in quantity supplied will be 0. Therefore, the co-op cannot reduce their milk production to obtain the 10% price increase.

We can find the percentage change in demand using the price elasticity of demand:

% change in quantity demanded = price elasticity of demand x % change in price
0.75 = 10% / % change in price
% change in price = 10% / 0.75 = 13.33%

Therefore, the co-op should increase the price of milk by 13.33%. However, they want to increase it by only 10%. To achieve this, they need to reduce their milk production so that the demand increases, leading to a higher price. The percentage change in quantity demanded will be the same as the percentage change in price, so the co-op needs to reduce their milk production by:

% change in quantity demanded = price elasticity of demand x % change in price
0.75 x 10% = 7.5%

Therefore, the co-op should reduce their milk production by 7.5% to obtain the 10% price increase.

A Dairy Co-Op in Ontario Is Trying to Raise Milk