Please help! 1. When the price of wheat rises from $2.34 to $2.46, some farmers
ID: 1168196 • Letter: P
Question
Please help!
1. When the price of wheat rises from $2.34 to $2.46, some farmers switch crops, and the amount of barley offered on the market falls from 101 million bushels to 99 million. What is the cross elasticity of supply?
2. When the wage rate rose from $6.25 per hour to $6.75 per hour, employment in Fastfood, Inc. fell from 5,100 to 4,900. What is the price elasticity of demand for labor?
3. Explain why, when the price of a good changes, the price elasticity of demand is likely to be higher or lower as a longer period of time elapses. Consider as an example the OPEC oil price increases in the 1970s.
Explanation / Answer
1
Cross elasticity of supply refers to the percentage change in supply of one commodity due to percentage change in price of other commodity.
Thus
Cross elasticity of supply = % Change in supply of barley / % change in price of wheat
% Change in supply of barley = (99 – 101)/101 = -.0198 or -1.98%
% change in price of wheat = (2.46 – 2.34) / 2.34 = .05128 = 5.128%
Cross elasticity of supply = -.0198 / .05128 = -.386
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