Question

At a price of $4 per unit, Gadgets Inc. is willing to supply 20,000 gadgets, while United Gadgets is willing to supply 10,000 gadgets. If the price were to increase to $8 per unit, their respective quantities supplied would rise to 45,000 and 25,000. If these are the only two firms supplying gadgets, what is the elasticity of supply in the market for gadgets (use the midpoint formula)

Answer 1

Answer:

1.2

Explanation:

Average quantity supplied:

= (70,000 + 30,000) ÷ 2

= 50,000

Therefore,

Percentage change in quantity supplied:

= Change in quantity supplied ÷ Average quantity supplied

= (70,000 - 30,000) ÷ 50,000

= 40,000 ÷ 50,000

= 0.8

Average price:

= (8 + 4) ÷ 2

= 6

Therefore,

Percentage change in price:

= Change in price ÷ Average price

= (8 - 4) ÷ 6

= 4 ÷ 6

= 0.667

Hence,

Elasticity of supply in the market for gadgets:

= Percentage change in quantity supplied ÷ Percentage change in price

= 0.8 ÷ 0.667

= 1.2