Question

4. A nursery is willing to supply 75 plants when the price per plant is $18 and 100 plants when the price per plant is $20.  The price elasticity of supply in this case using the mid-point method would be

a. 2.71 which indicates that the supply is elastic

b. 2.71 which indicates that the supply is inelastic

c. 0.27 which indicates that the supply is elastic

d. 0.27 which indicates that the supply is inelastic

5. Assuming that the price elasticity for a good is 0.3 therefore, a 20% decrease in the price of that good would

a. result in a 0.15 percent increase in the quantity demanded

b. result in a 6 percent increase in the quantity demanded

c. result in a 66 percent increase in the quantity demanded

d. result in a 0.06 percent increase in the quantity demanded

7. In the market of purses a 15 percent change in price causes 20 percent change in quantity supplied. In this situation the price elasticity of supply is

a. 0.74, and supply is inelastic

b. 1.33, and supply is elastic

c. 0.74, and supply is elastic

d. 1.33, and supply is inelastic

Answer 1

Answer : Let Q1 = old quantity; Q2 = new quantity; P1 = old price; P2 = new price .

4) The answer is option a.

Changes in quantity (Q) = 100 - 75 = 25

Changes in price (P) = 20 - 18 = 2

(Q1 + Q2) / 2 = (75 + 100) / 2 = 87.5

(P1 + P2) / 2 = (18 + 20) / 2 = 19

The formula of mid-point price elasticity of supply is,

Price elasticity of supply (Es) = [Q / {(Q1 + Q2) / 2}] / [P / {(P1 + P2) / 2}]

=> Es = [25 / 87.5] / [2 / 19]

=> Es = 2.71

Here Es = 2.71 > 1, hence the supply is elastic.

Therefore, option a is correct.

5) The answer is option d.

% changes in price = 20% = 0.2

Price elasticity = 0.3

Price elasticity = % changes in quantity demanded / % changes in price

=> 0.3 = % changes in quantity demanded / 0.2

=> % changes in quantity demanded = 0.3 * 0.2 = 0.06

When price fall then quantity demanded increase. Therefore, option d is correct.

7) The answer is option b.

Price elasticity of supply (Es) = % changes in quantity supplied / % changes in price = 20 / 15 = 1.33

As Es = 1.33 > 1, hence supply is elastic.

Therefore, option b is correct.