The price elasticity of demand for milk has been estimated to be somewhere between -0.49 and -0.63.If a new system of feeding and milking cows yields a 15 percent increase in the production of milk throughout the country, how will that affect total expenditures on milk, 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

With a price elasticity of demand between -0.49 and -0.63, demand for milk is relatively inelastic (less responsive to changes in price). Therefore, a 15% increase in production would likely result in a greater than 15% decrease in price. Assuming demand remains relatively constant, the decrease in price would not be enough to offset the increase in production, leading to a decrease in total expenditures on milk.

The Price Elasticity of Demand for Milk Has Been Estimated