Suppose the price elasticity of demand for wheat is 1.80 in the long run and 0.40 in the short run.

A. If the price of wheat rises from $5.85 per bushel to $6.15 per bushel, what is the percentage change (using the midpoint method) in quantity-demanded in the

i. long run?

ii. short run?

B. Explain why the change in quantity-demanded would be greater in the long run than in the short run.

Price Elasticity of Demand = Percentage change in quantity demanded / percentage change in price

Given : Current price (P1) = $6.15

Initial Price (P0) = $5.85

Percentage change in price = (P1- P0)/P0 * 100

Percentage change in price = ($6.15 -$5.85)/5.85 * 100 = 5.12%

A.i.Elasticity in long run = 1.80

Putting the elasticity value and the percentage change in price value in the elasticity formula we have,

Price Elasticity of Demand = Percentage change in quantity demanded / percentage change in price

1.80 = Percentage change in quantity demanded/ 5.12

Percentage change in quantity demanded = 5.12 * 1.80 = 9.23%

Thus in the long run when the price increases by 5.12%, the quantity demand will increase by 9.23%.

A.ii. Elasticity in short run = 0.40

Putting the elasticity value and the percentage change in price value in the elasticity formula we have,

Price Elasticity of Demand = Percentage change in quantity demanded / percentage change in price

0.40 = Percentage change in quantity demanded/ 5.12

Percentage change in quantity demanded = 5.12 * 0.40 = 2.04%

Thus in the long run when the price increases by 5.12%, the quantity demand will increase by 2.04% .

B. The quantity demanded would be greater in long run than in short run because as we can see, the elasticity of demand increases in long run. This increase in elasticity of demand is due to the fact that, in the long run, the consumer's demand preferences change, there can be greater availability of substitutes and increased time period can allow people greater flexibility to adjust their consumption preferences. This increases the responsiveness of the consumers to the change in price of the good. This is the reason why in the long run as the elasticity of demand increases, the quantity demanded will also increase and will be greater than quantity demanded in short run.