Question

An increase in the demand for green tea raises the price of apples from US$16 a kilo to US$20 a kilo. As a result, quantity supplied increases by 30 percent. Using the midpoint formula, calculate the value of the price elasticity of supply.

a-2.22

b-1.35

c-1.875

d-7.5

Answer 1

Answer: (b) 1.35

The mid-point formula for the price elasticity of supply is;

.

Q2-Q1 (Q2+Q1)/2 %Δος Es P2 - P1 %ΔΡ (P2 P1)/2 II

Here, we already know the numerator , i.e. the percentage change in quantity supplied: %ΔQ_s = 30% or 0.3

The percentage change in price is;

%ΔP= ($20 - $16)/ [($20 + $16)/2] = $4/ $18 = 2/9

E_s = 0.3/ (2/9) = 1.35