At a price of $300, a cell phone company manufactures 100,000 phones. At a price of $400, the company produces 300,000 phones. What is the price elasticity of supply? (Round your answer to two decimal places.)
Answer and Explanation:
The elasticity of supply is 3.5.
The elasticity of supply is calculated as the ratio of the percentage change in quantity supplied to the percentage change in price. In this question, price increases from 300 to 400, using the mid-point method, the percentage change in price is:
- (400 - 300) / ((400 + 300) / 2) = 0.2857
Quantity supplied increases from 100,000 to 300,000, using the mid-point method, the percentage change in quantity is:
- (300,000 - 100,000) / ((300,000 + 100,000) / 2) = 1.
Thus the price elasticity of demand = 1 / 0.2857 = 3.5.
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Learn more about this topic:
from Economics 101: Principles of MicroeconomicsChapter 2 / Lesson 14
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