Consider the market for peanuts. Initially, the quantity supplied is 35 and at $2.50 each. Then a blight occurs that destroys a significant portion of peanut crops. This shifts the supply curve leftward. The new quantity supplied is now 30 and at $3.50 each. Calculate total revenue in the peanut market before and after the blight. Using the midpoint method, the price elasticity of demand for peanuts between the prices of $2.50 and $3.50 per bushel is _____ , which means demand is ______ between these two points.
To calculate total revenue in the peanut market before and after the blight, we need to multiply the quantity supplied by the price for each situation.
Before the blight:
Quantity supplied: 35
Price: $2.50 per bushel
Total revenue before the blight = Quantity supplied before the blight * Price before the blight
= 35 * $2.50
= $87.50
After the blight:
Quantity supplied: 30
Price: $3.50 per bushel
Total revenue after the blight = Quantity supplied after the blight * Price after the blight
= 30 * $3.50
= $105.00
So, the total revenue in the peanut market before the blight is $87.50 and after the blight is $105.00.
Now let's calculate the price elasticity of demand using the midpoint method. The formula for price elasticity of demand is:
Price elasticity of demand = (change in quantity / average quantity) / (change in price / average price)
Given:
Initial price (P1) = $2.50
Final price (P2) = $3.50
Initial quantity (Q1) = 35
Final quantity (Q2) = 30
First, we calculate the change in quantity and change in price:
Change in quantity = Q2 - Q1
= 30 - 35
= -5
Change in price = P2 - P1
= $3.50 - $2.50
= $1.00
Next, we calculate the average quantity and average price:
Average quantity = (Q1 + Q2) / 2
= (35 + 30) / 2
= 65 / 2
= 32.5
Average price = (P1 + P2) / 2
= ($2.50 + $3.50) / 2
= $6.00 / 2
= $3.00
Now, we can calculate the price elasticity of demand:
Price elasticity of demand = (change in quantity / average quantity) / (change in price / average price)
= (-5 / 32.5) / ($1.00 / $3.00)
= (-0.1538) / (0.3333)
= -0.4615
The negative sign indicates that the demand for peanuts is elastic between the prices of $2.50 and $3.50 per bushel. This means that a change in price will have a relatively larger effect on the quantity demanded.