Question

1. Use two diagrams (one for Alberta, one for the world) to explain why the following might be
true: A drought around the world raises the total revenue that farmers received from the sale of
grain, but a drought only in Alberta reduces the total revenue that Alberta farmers receive.
2. You have the following information about good X and good Y:
• Income elasticity of demand for good X: -3• Cross-price elasticity of demand for good X with respect to the price of good Y: 2
Would an increase in income and a decrease in the price of good Y unambiguously decrease the
demand for good X? Why or why not?
3. A price change causes the quantity demanded of a good to decrease by 30 percent, while the
total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic?
Explain.

Answer 1

If there will be drought across the world then the equilibrium market price would rise because if teh shift in the supply curve which will allow Alberta farmers to raise their produce price and also export to earn higher revenues, but the drought in Alberta will cause the supply curve to shift left but worldnprices remains same will cause flux of imports and hence domestic farmers will also have to sell their produce at prices equals world price which will result in drop in Revenue as the quantity produce would be lower because of shift

2. Since income elasticity is negative which represents inferior good as income increases quantity demanded decreases and since cross price elasticity is positive a decrease in price of other product will cause decrease in quantity demanded for first Product which represents substitute Product Hence, Increase in income and decrease in price for Y will result in Quantity demanded for X.

3. It represents Inelastic demand since as price changes quantity demanded falls but revenue rose which represents price effect is larger than the demand effect hence, the elasticity will be <1 and the price increase would be larger than 30% drop in demand