Question

Consider two markets: the market for motorcycles and the market for pancakes. The initial equilibrium for both markets is the same, the equilibrium price is $3.50, and the equilibrium quantity is 37.0. When the price is $10.75, the quantity supplied of motorcycles is 73.0 and the quantity supplied of pancakes is 111.0. For simplicity of analysis, the demand for both goods is the same.

Using the midpoint formula, calculate the elasticity of supply for pancakes. Please round to two decimal places.

Supply in the market for motorcycles is:

A. more elastic than supply in the market for pancakes.

B. less elastic than supply in the market for pancakes.

C. the same elasticity as supply in the market for pancakes.

D. There is not enough information to tell which has a higher elasticity.

Answer 1

Consider the given problem where there are two goods “motorcycle” and “pancake”. So, the initial price and the quantity combinations are same that is “P=3.5” and “Q=37”. Now, the “P” increases to “10.75” the “Q” of “motorcycle” is “73” and of pancake is “111”. So, the mean value of “P” is given by, “(3.5+10.72)/2 = 7.125”. Now, the mean value of “Q” of motorcycle and pancake are given by, “(37+73)/2 = 55” and “(37+111)/2=74”. So, the elasticity of supply of motorcycle is given by.

=> (dQ/dP)*(P/Q) = (73-37/10.75-3.5)*(7.125/55) = (36/7.25)*(7.125/55) = 4.9655*(7.125/55) = 0.64.

Now, the elasticity of supply of pancake is given by.

=> (dQ/dP)*(P/Q) = (111-37/10.75-3.5)*(7.125/74) = (74/7.25)*(7.125/74) = 10.21*(7.125/74) = 0.98.

So, here the supply elasticity of “pancake” is more compare to “motorcycle”. So, here “B” is the correct answer.