A company supplies 20 units of a particular product per month, at a price of ` 10 per unit. If price elasticity of supply is 5, how many units would the company supply at a price of ` 15 ?
70
Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price, so the calculation runs from the price change to the quantity change.
First find the percentage change in price. The price rises from ₹ 10 to ₹ 15, an increase of ₹ 5 on a base of ₹ 10, which is 50 percent.
Next use the elasticity to find the percentage change in quantity. Since elasticity equals percentage change in quantity divided by percentage change in price, the percentage change in quantity is elasticity multiplied by the percentage change in price, that is 5 × 50 = 250 percent.
Finally apply that to the original quantity. Supply rises by 250 percent of 20 units, which is 50 units, so the new quantity is 20 + 50 = 70 units. Equivalently, the new supply is 20 × (1 + 2.5) = 70 units per month.
The trap is to multiply 20 by 5 to get 100, or to add only 50 percent and reach 30; both ignore that the elasticity relates the two percentage changes rather than the levels themselves.
Hence the company would supply 70 units at a price of ₹ 15.
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