Question

1)Using the formula for measuring the price elasticity of supply: Suppose the price of apples goes up from $18 to $20 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes.

A)Compute the coefficient of price elasticity of supply (midpoints approach) for Goldsboro’s supply.

B)Is its supply elastic, or is it inelastic?

C)Does income increase or decrease based on answer in B- Explain-don’t compute

2) Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4.

A) What can you conclude about how products A and B are related?

B) Products C and D?

Answer 1

Answer :

Question 1:

Part A

Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price

Percentage change in quantity supplied = (1200-1000)/1000*100 = 20%

Percentage change in price =(20-18)/18 = 11.11%

Price elasticity = 20 / 11.11 = 1.8

Part B : Supply is elastic .

Price elasticity of supply measures the responsiveness to the supply of a good or service after a change in its market price. Elastic means the product is considered sensitive to price changes. Since the result is more than 1, it is elastic.

Part C :

Percentage change in quantity supplied is more than percentage change in price. Therefore, income will increase.

Question 2 :

2) Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4.

A) What can you conclude about how products A and B are related?

Answer : A and B are substitutes

Substitutes: Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.

B) Products C and D?:

Answer : C and D are complements

Complements: Two goods that complement each other have a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.