Question

At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 30. The price elasticity of the firm’s supply is 1.25. What quantity will the firm supply at the new price?

Answer 1

Initial Price, P₁ = Rs 10

Initial Output, Q₁ = 4 units

Final Price, P₂ = Rs 30

ΔP = P₂ − P₁

= Rs 30 − 10 = Rs 20

Elasticity of supply, e_s = 1.25

`e_s=(DeltaQ)/(DeltaP)xxP_1/Q_1`

`rArr1.25=(DeltaQ)/20xx10/4`

⇒ 1.25 × 8 = ΔQ

⇒ ΔQ = 10 units

Thus final output supplied, Q₂ = ΔQ + Q₁

Q₂ = 10 + 4 = 14 units