Editor’s Note: You may have heard that pricing theory needs updating. We agree. The economic way of thinking has long been used to analyze statistics absent intuition. Fortunately, Professor Bryan Cutsinger is here to help. We are pleased to present this first to that interest [for now] has been a monthly series in which Cutsinger presents pricing theory questions for your consideration.
Professor Cutsinger will be there for two weeks to get feedback in the comments section, helping you “solve” each problem. We can’t wait to see your answers!
Question 1:
In his book, Basic EconomicsThomas Sowell (2015) writes, “the price one producer is willing to pay for any given ingredient becomes the price other producers are forced to pay for that same ingredient” (p. 20). With that quote in mind, consider the following scenario:
The demand for drinking milk is increasing while the demand for milk in the form of cheese, ice cream, and yogurt remains the same. Assume that the supply of milk is perfectly inelastic. Explain why the elasticity of demand for milk in this alternative use determines how much milk will be diverted from this use for direct consumption.
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