Question

The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increase by 15 units. The price elasticity of the firm'* supply curve is 0.5. Find the initial and final output levels of the firm.

Answer 1

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

es = ΔQ/ΔP x P1/Q1

0.5 = 15/15 x 5/Q1

0.5 = 5/Q1

Q1 = 5/0.5

= 10units

Initial quantity = 10 units
Final quantity,Q2 = ΔQ + Q1
= 15 + 10
Therefore, Q2 = 25 units