To celebrate their Queen's 90th birthday, the country of Wonderland has decided to bake the world's largest cake. The main ingredient(input) 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, Es, for flour to be0.3and the elasticity of demand, Ed to be-1.2.

a. Assuming linear demand curves, calculate the percentage change in the price of flour that would result due to this project? Also, calculate the change in quantity supplied as well as the change in quantity demanded by private consumers. What is the opportunity cost of flour that should be used in a cost-benefit analysis of this project?

[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

Using the above equations, you should be able to find the change in price, P. Once, you have the value for P, you can plug it into the elasticity formula to find Qs & Qd]

b. Sketch the supply and demand for flour and show the opportunity cost on your sketch