The price elasticity of demand for peanuts has been estimated to be -0.38.If an insect infestation destroys 20 percent of the nation's peanut crop, how will that affect total expenditures on peanuts, all other things unchanged?
A) total expenditures will remain unchanged
B) total expenditures will fall
C) total expenditures will rise
D) not enough information is given to answer the question

Question

Quizplus · Accepted Answer

The price elasticity of demand for peanuts is inelastic (-0.38), meaning that the percentage change in quantity demanded is less than the percentage change in price. If 20% of the peanut crop is destroyed, supply decreases, leading to higher prices. Since demand is inelastic, the increase in price will lead to a proportionally smaller decrease in quantity demanded, resulting in higher total expenditures on peanuts.

The Price Elasticity of Demand for Peanuts Has Been Estimated