Question

The demand for toilet paper can be represented by Qd = 19 - 2.1P, while supply can be represented by Qs = 2 + 3.0P. Calculate the elasticity of supply at the equilibrium price and quantity. Round your final answer to two decimal places.

Answer 1

The equilibrium price and quantity can be obtained at the point where the demand curve intersects the supply curve or at the point where both are equal. Thus for finding the equilibrium price and quantity we will equate the demand and supply equations.

Qd = Qs

19-2.1P = 2+3P

17 = 5.1P

P = 17/5.1 = 3.33

Equilibrium price = $3.33

Now, putting this price in any of the equation will give us the equilibrium quantity (as at the equilibrium, quantity demanded = quantity supplied).

Qs = 2+3P

= 2 + 3*3.33

= 11.99 = 12

Thus the equilibrium quantity is 12.

Price elasticity of supply shows the responsiveness of change in quantity supplied due to a change in prices of the goods. It is given by the following formula:

Elasticity of supply = dQs/dP * (P/Q)

Here, dQs/dP is the differentiation of supply curve with respect to prices, P is the equilibrium prices and Q is the equilibrium quantity.

dQs/dP = 3

Elasticity of supply = 3* (3.33/12) = 0.83