A group of dairy farmers is trying to raise milk prices by 10%.If the price elasticity of demand for milk is 0.75 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?
A)10%
B)7.5%
C)15%
D)13%

Question

Quizplus · Accepted Answer

Since the price elasticity of supply for milk is 0, this means that the quantity supplied is fixed and does not change based on price. Therefore, the entire burden of the price increase falls on the consumers. 
Using the formula for price elasticity of demand, we know that:
% change in quantity demanded = Elasticity x % change in price
We want to increase price by 10%, so:

0.75 x 10% = 7.5%

This means that quantity demanded will decrease by 7.5%. To maintain the same revenue levels as before the price increase, the dairy farmers need to reduce their milk production by the same amount, which is 7.5%.

A Group of Dairy Farmers Is Trying to Raise Milk