Question 2

Adam, who specializes in production of butter, has decided to apply the concept of elasticity to study

how the amount of milk affects the amount of butter he can produce.

a) Can the concept of elasticity be applied here? Explain briefly.

b) What will be formula (equation) of elasticity in this case? Explain in detail how you derived the

formula.

c) Should the cross price elasticity of butter and bread be positive, negative or zero? Explain in detail the

logic of your answer.