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Consider the traditional farm problem: Food can be viewed as a necessity, and overall has a price-inelastic demand.
a) Suppose that 10% of each farmer's crop were destroyed. What is the effect on farmer income?
b) If the price elasticity of demand is -0.5, what is the effect of (a) on price? Ignore all other possible sources of supply to do this - let the supply curve be vertical.
c) Who would be paying for this change?
d) Congress decides that just destroying part of the existing food crop would be politically dangerous. It passes a resolution stating that food is extremely important to human life on the planet, that farmers are not being compensated enough by the current market price of $5 per unit, and that the price should be $6. Being patriotic, the farmers of the country start charging that price immediately, with all participating. What happens?
Explanations for each part is appreciated.
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