To celebrate their Queen's 90^thbirthday, the country of Wonderland has decided to bake the world's largest cake. The main ingredient of the cake will be flour. It has been estimated that the cake will use 50,000 tons of flour, which represents 20% of the current supply of flour. The current price of flour is $4000 per ton. Previous study has shown the elasticity of supply, _s, for flour to be 0.3 and the elasticity of demand, _dto be -1.2.

a. Assuming linear demand curves, what is thepercentage change in the price of flouryou would anticipate as a result of this project? What do you expect to be thechange in quantity suppliedas well as thechange in quantity demandedby private consumers? What is theopportunity cost of flourthat you would use in a cost-benefit analysis of this project?[ 4 marks]

[Hint: Es = (Qs/P)(P/Qs) and Ed =(Qd/P)(P/Qd)where Qs is current supply and P is current price.

Note that the amount of flour demanded by the project Qp = Qs - Qd]

b. Sketch thesupply and demand for flourand show theopportunity coston your sketch.[2 marks]