Question

Calculate the price elasticity of supply for each of the following combinations of

price and quantity supplied, using the midpoint formula (arc elasticity). In each

case, determine whether supply is elastic, inelastic, perfectly elastic, perfectly

inelastic, or unit elastic.

c. Price falls from $2.25 to $1.75; quantity supplied remains at 600 units.

d. Price increases from $1.75 to $2.25; quantity supplied increases from

466.67 units to 600 units.

Answer 1

c) Ans:   The price elasticity of supply is 0 and supply is perfectly inelastic.

Explanation:

Initial Price ( P1) = $2.25

New price ( P2) =$1.75

Initial Quantity ( Q1)= 600

New Quantity ( Q2) = 600

Price elasticity of supply= = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 600 - 600) / ( 2.25 - 1.75 ) } * {( 2.25 + 1.75) /( 600 + 600)}

= ( 0/ 0.50) * ( 4 / 1200)

= 0 * 0.003333

=0

Perfectly inelastic supply means there is no change in quantity supplied with the change in price.

When Price elasticity of supply= 0 , then supply is perfectly inelastic

d) Ans: The price elasticity of supply is 0.98 and supply is inelastic.

Explanation:

Initial Price ( P1) = $1.75

New price ( P2) =$2.25

Initial Quantity ( Q1)= 466.67

New Quantity ( Q2) = 600

Price elasticity of supply= = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 600 - 466.67 ) / ( 2.25 - 1.75 ) } * {( 2.25 + 1.75) /( 466.67 + 600)}

= ( 133.33 / 0.50) * ( 4 / 1066.67)

= 266.66 * 0.0037

=0.98

Inelastic supply means there is less responsiveness of quantity supplied to the change in price.

When Price elasticity of supply < 1  , then supply is inelastic.