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Question
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
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Solution
Elasticity of Supply, es = 0.5
Initial Price, P1 = Rs 5
Final price, P2 = Rs 20
ΔP = P2 − P1
= 20 − 5
ΔP = 15
ΔQ = 15
`e_s=(DeltaQ)/(DeltaP)xxP_1/Q_1`
`rArr0.5=15/15xx5/Q_1`
`rArr0.5=5/Q_1`
`rArrQ_1=5/0.5=10 " units"`
Initial quantity = 10 units
Final quantity, Q2 = ΔQ + Q1
= 15 + 10
Therefore, Q2 = 25 units
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