Question

At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 30. The price elasticity of the firm's supply is 1.25. What quantity will the firm supply at the new price?

Answer 1

Initial Price, P₁ = Rs 10
Initial Output, Q₁ = 4 units
Final Price, P₂ = Rs 30

ΔP = P₂ - P₁

= Rs 30 - 10 = Rs 20
Elasticity of supply,e_s = 1.25

e_s =ΔQ/ΔP x P₁/Q₁

1.25 = ΔQ/20 x 10/4

= 1.25 x 8 = ΔQ

= ΔQ = 10 units

Thus final output supplied,  Q₂ = ΔQ + Q₁

Q₂ = 10 + 4 = 14 units