Suppose an increase in world demand for potash (used in the production of fertilizer) increases the...

Suppose an increase in world demand for potash (used in the production of fertilizer) increases the price from $285 per tonne to $315 per tonne. Annual Canadian production increases from 15 million tonnes to 17 million tonnes. What is the elasticity of supply of Canadian potash?

Select one:

1.0

1.25

0.5

2.5

0.8

Solutions

Expert Solution

And. B. 1.25

Using the midpoint method

Price Quantity supplied

$285 per tonne 15 million tonnes

$315 per tonne 17 million tonnes

% change in price = change in price/ average price x 100

= ( $315 - 285 )/( $285 + $315)/2 x 100

= 10 %

% change in quantity supplied = change in quantity/ average quantity x 100

= ( 17 million tonnes - 15 million tonnes)/ (15 million tonnes + 17 million tonnes)/2 x 100

= 12.5 %

Then

The elasticity of supply of Canadian potash =

% change in quantity supplied/% change in price

= 12.5 %/ 10 %

= 1.25

Hence, the price elasticity of supply of Canadian potash is 1.25 which is elastic because of the elasticity is greater than unity.

Rahul Sunny answered 1 year ago

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