Question

The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increase by 15 units. The price elasticity of the firm's supply curve is 0.5. Find the initial and final output levels of the firm.

Answer 1

Elasticity of Supply, e_s = 0.5
Initial Price, P₁ = Rs 5
Final price, P₂ = Rs 20

ΔP = P₂ - P₁

= 20 - 5

ΔP = 15

ΔQ = 15

e_s = ΔQ/ΔP x P₁/Q₁

0.5 = 15/15 x 5/Q₁

0.5 = 5/Q₁

Q₁ = 5/0.5

= 10units

Initial quantity = 10 units
Final quantity,Q₂ = ΔQ + Q₁
= 15 + 10
Therefore, Q₂  = 25 units