A group of dairy farmers is trying to raise milk prices by 10%. If the price elasticity of demand for milk is 0.5 and the price elasticity of supply for milk is 0, then by how much should farmers reduce their milk production to obtain the 10% increase?

5%

Explanation:

Given:

Price increase percentage = 10%

Price elasticity of demand = 0.5

Change in quantity percentage = ?

Computation

Price elasticity of demand = % change in quantity of demand / % change in Price.

0.5 = % change in quantity of demand / 10%

0.5 x 10% = % change in quantity of demand

% change in quantity of demand = 5%

Therefore, they need to reduce 5% mil production