Question

Suppose that when the price of cereal increases from p3.9 to p4 quantity supplied increases from 210 to 230. calculate price elasticity of supply.

Answer 1

The price elasticity of supply measures the responsiveness of quantity supplied to a change in price. In this case, when the price of cereal increases from p3.9 to p4, the quantity supplied increases from 210 to 230. By calculating the percentage changes in quantity supplied and price, we can determine the price elasticity of supply, which in this case is approximately 3.72.

Step-by-step explanation:

The price elasticity of supply measures the responsiveness of quantity supplied to a change in price. It is calculated by dividing the percentage change in quantity supplied by the percentage change in price. In this case, the price of cereal increases from p3.9 to p4, and the quantity supplied increases from 210 to 230.

Step 1: Calculate the percentage change in quantity supplied:

1. Percentage change in quantity supplied = ((new quantity supplied - old quantity supplied) / old quantity supplied) x 100
2. Percentage change in quantity supplied = ((230 - 210) / 210) x 100
3. Percentage change in quantity supplied = (20 / 210) x 100
4. Percentage change in quantity supplied ≈ 9.52%

Step 2: Calculate the percentage change in price:

1. Percentage change in price = ((new price - old price) / old price) x 100
2. Percentage change in price = ((4 - 3.9) / 3.9) x 100
3. Percentage change in price = (0.1 / 3.9) x 100
4. Percentage change in price ≈ 2.56%

Step 3: Calculate the price elasticity of supply:

1. Price elasticity of supply = (Percentage change in quantity supplied / Percentage change in price)
2. Price elasticity of supply = (9.52% / 2.56%)
3. Price elasticity of supply ≈ 3.72

Therefore, the price elasticity of supply is approximately 3.72.