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

$e_s=1.25$

$\begin{array}{cc}\text{Price(Rs)}& \text{Supply (Units)}\\ 10& 4\\ 30& ?\end{array}$

$e_s=\frac{\Delta q_s}{\Delta p}.\frac{p}{q_s}$

$1.25=\frac{\Delta q_s}{20}\times \frac{10}{4}$

$\Rightarrow \Delta q_s=\frac{1.25\times 20\times 4}{10}=10$

New supply = $q_s+\Delta q_s=4+10=14$ units

Hence, the new supply at the new price will be 14 units.