. A bumper crop of farm products causes:
A. only a slight decline in the price of farm products because the demand for farm products is income inelastic.
B. a large decline in the price of farm products because the demand for farm products is price inelastic.
C. only a slight decline in the price of farm products because the demand for farm products is income elastic.
D. a large decline in the price of farm products because the demand for farm products is price elastic.
Take a shot, what do you think?
Hint: draw supply and demand graphs, compare a graphs where demand is highly elastic (almost flat) vs highly inelastic (almost vertical)
Hint: question has nothing do do with the incomes of consumers; eliminate C.
its A
To determine the correct answer, we need to understand the concepts of income elasticity and price elasticity of demand.
Income elasticity of demand measures how sensitive the quantity demanded of a product is to changes in income. If a product is income inelastic, it means that a change in income has a relatively small impact on the demand for the product. On the other hand, if a product is income elastic, a change in income has a relatively large impact on the demand for the product.
Price elasticity of demand measures how sensitive the quantity demanded of a product is to changes in price. If a product is price inelastic, it means that a change in price has a relatively small impact on the demand for the product. Conversely, if a product is price elastic, a change in price has a relatively large impact on the demand for the product.
In this scenario, a bumper crop of farm products would mean an increase in the supply of farm products. When supply increases, assuming other factors remain constant, this would put downward pressure on prices. Now, let's look at the answer choices:
A. only a slight decline in the price of farm products because the demand for farm products is income inelastic.
This answer suggests that the slight decline in price is due to the income inelasticity of demand. However, income elasticity is not relevant in this scenario since it does not explain the change in prices resulting from a bumper crop. Therefore, this answer is incorrect.
B. a large decline in the price of farm products because the demand for farm products is price inelastic.
This answer suggests that the large decline in price is due to the price inelasticity of demand. According to the law of demand, when price decreases, quantity demanded increases. Therefore, a bumper crop causing a large decline in prices supports the idea that demand is price elastic. This is because when prices decrease, consumers are willing and able to purchase more of the farm products. Thus, this answer is correct.
C. only a slight decline in the price of farm products because the demand for farm products is income elastic.
Similar to option A, this answer incorrectly assumes that changes in income elasticity are driving the decline in prices. Therefore, this answer is incorrect.
D. a large decline in the price of farm products because the demand for farm products is price elastic.
This answer correctly suggests that the large decline in price is due to the price elasticity of demand. As discussed earlier, a bumper crop increases supply, leading to lower prices. If demand is price elastic, consumers will respond to the lower prices by purchasing more farm products, which would further contribute to the decline in prices. Therefore, this answer is correct.
In conclusion, the correct answer is D. A bumper crop of farm products causes a large decline in the price of farm products because the demand for farm products is price elastic.