The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large portion of the tobacco crop
What will happen in the market for tobacco? Will the equilibrium price and quantity change? If so, how? What will happen to the total revenue earned by tobacco farmers?
The drought will lower the supply of tobacco. The supply of tobacco will shift to the left, increasing price but lowering the equilibrium quantity sold. However, since the demand for tobacco is price inelastic, the percentage increase in price will be larger than the percentage decrease in quantity demanded. Therefore, the total revenue earned by tobacco farmers will rise.
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Over the price range from $180 to $120 in Figure 20.1, ceteris paribus,
A. Demand is increasing. B. Total revenue is maximized. C. Utility is maximized. D. Demand is elastic.
Diagram a model of a perfectly competitive market and a separate model of a firm experiencing economic profits. Explain and illustrate on your models the changes that take place in the long run. Be sure to explain why any changes take place.
What will be an ideal response?