Question

Here’s the market for hand sanitizer: Pd = 30 - 0.8Qd Ps= 0.5 + 0.2 Qs Using the averaging method, calculate the price elasticity of supply between price =3 and price = 4

How to get the solution for this?

Answer 1

Ps = 0.5 + 0.2 * Qs

At price (P1) of 3, there is supply (Q1) of 12.5

At price (P2) of 4, there is supply (Q2) of 17.5

Mid-point average method to calculate elasticity = {(Q2 - Q1) / [(Q2 + Q1) / 2]} / {(P2 - P1) / [(P2 + P1) / 2]}

Mid point elasticity = {(17.5 - 12.5) / [(17.5 + 12.5) / 2]} / {(4 - 3) / [(4 + 3) / 2]} = (0.33 / 0.285) = 1.16

Thus, there is elasticity of supply = 1.16 using mid point method which says that supply curve is elastic between this range.