The Globe and Mail (December 16, 1997) reported that milk consumption declined following price increases: “Since the early 1980s, the price of milk in Canada has increased 22 per cent. As prices rose, the demand for milk fell off. Total [consumption] of milk on a per capita basis dropped . . . to 2.62 hectolitres in 1995 from 2.92 hectolitres in 1986.”Use these data to estimate the price elasticity of demand for milk. (1.5marks)0.49 milk is inelasticAccording to your estimate, what happens to milk producers’ revenue when the price of milk rises? (1 mark) When the price of milk rises milk producers revenue drop because the demand for milk droppedWhy might your estimate of the elasticity be unreliable? (Hint: Notice that The Globe and Mail is careless about the distinction between demand and quantity demanded.) (1 mark)

Price elasticity of demand: It refers to change in the price of the goods and services and…

Answered: The Globe and Mail (December 16, 1997)…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The Globe and Mail (December 16, 1997) reported that milk consumption declined following price increases: “Since the early 1980s, the price of milk in Canada has increased 22 per cent. As prices rose, the demand for milk fell off. Total [consumption] of milk on a per capita basis dropped . . . to 2.62 hectolitres in 1995 from 2.92 hectolitres in 1986.”

Use these data to estimate the price elasticity of demand for milk. (1.5marks)

0.49 milk is inelastic

According to your estimate, what happens to milk producers’ revenue when the price of milk rises? (1 mark)

When the price of milk rises milk producers revenue drop because the demand for milk dropped

Why might your estimate of the elasticity be unreliable? (Hint: Notice that The Globe and Mail is careless about the distinction between demand and quantity demanded.) (1 mark)

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