Chapter 6R, Problem 1CTQ

To determine

How sensitive the demand for donuts is to their price in country A? How much high the price can go in the absence of mechanical wheat harvesters and other tools, and the relationship between technology and employment in the donut industry?

Explanation of Solution

As most of the population in country A consumes donuts which indicates that the price elasticity of demand for donuts is inelastic in the country. People would like to buy donuts each day which makes the price elasticity inelastic as they will purchase it at any price. Moreover, people in country A also do not substitute this product for wheat which also makes its demand inelastic.

In the absence of mechanical wheat harvesters and other tools such as dough mixers and fryers, the price will go up to its maximum as it will take much more time to produce donuts. And, also the cost of labor will increase because, in the absence of tools, more and more workers will be needed to produce donuts which in turn increases the cost of the product. As a result of this, the price of donuts will increase at a higher rate.

Technology and employment in the industry of donuts are related to each other because an increase in technology will improve the wages of workers as by using technology in the industry, machines can provide final products at a cheap rate when compared to the production which is obtained without using technology. Therefore, an increase in employment will increase the consumption of donuts, and people prefer the goods at any price in the market. This makes the demand inelastic for the product.

Economics Concept Introduction

Introduction: The relationship between the percentage change in a product's quantity which is demanded in the market and the percentage change in price in the market is known as price elasticity of demand. This helps to understand how supply and demand can shift in response to an increase or decrease in price.