The current price floor in the agricultural lettuce market i

The current price floor in the agricultural lettuce market is $1 per head. The price floor makes it such that the price of lettuce is 25% higher than equilibrium price and 100 heads of lettuce are demanded at the price of $1. Assuming that the elasticity of demand for lettuce is -0.50, what would be the equilibrium price and quantity of lettuce if the government removed the current price floor?

Solution

SOLUTION-

Elasticity of demand = percentage change in quantity demanded / percentage change in price

.50 = x / 25

Thus, quantity demanded will reduce by .50 * 25 = -12.5 %.

Quanttity demanded after price increase is 100 which has reduced by 12.5 per cent than the equilibrium quantity.

Initial equilibrium quantity demanded at equilibrium price = Q1 - (12.5 /100) * Q1 = 100

Q1 = 114.286 units

For equilibrim price , more information is required.