Question

The market price of a good changes from Rs. 5 to Rs. 20. As a result, the quantity supplied by a firm increases 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

$e_s=0.5$

$\begin{array}{cc}\text{Price(Rs)}& \text{Supply (Units)}\\ 5& \Delta q_s=15\\ 20& ?\end{array}$

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

$.5=\frac{15}{15}\times \frac{5}{q_s}\Rightarrow q_s=10$

New supply = $q_s+\Delta q_s=10+15=25$

Hence, initial and final output levels of the firm are 10 and 25 units respectively.