Question

Suppose the quantity of supply always increases by 100 units if price increases $5. What is the price elasticity of

supply when price and quantity of supply are $1 and 10 units, respectively?

       a.    -2

b.     1

c.     2

d.     0.5

e.     Not enough information

Answer 1

Price elasticity of supply = ( New quantity - old quantity / (( old quantity + new quantity ) / 2) / (New price - old price / ( old price + new price ) / 2 )

Here old or initial quanity is 10 and initial price is $1. New quantity is 100 units and new price is $5.

= (( 100 -10 ) / 100 + 10) /2 )/ (5 - 1) / (5 +1) /2

= ( 90 / 55 ) / ( 4 /3)

= 1.63 / 1.33

= 1.22

The correct answer is "E". Not enough information. Because the right answer is not given in the option.