Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

Question

Justin Hunter

Business

17 May, 01:32

Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

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Ryder Chang · Answer 1

B) lower both price and total revenue

Explanation:

The new vitamin should shift the supply curve of milk to the right since it would increase the quantity supplied and decrease the price. The problem is that since the demand of milk is inelastic, a decease in its price will cause a smaller increase in the quantity demanded.

For example, if the price is $1 per pint, and the price elasticity is 0.5, and the quantity demanded is 100. If the price decreases by 10% to $0.90 per pint, the demand will only increase to 105 pints. So total revenue will decrease from $100 to $94.50