Practise measuring producer responsiveness with percentage or midpoint calculations, classifying supply elasticity, and finding implied quantity changes.
The markets for bananas, muffins, and coffee are interrelated, and each market is perfectly competitive.
In the market for bananas, the equilibrium price is $ 1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds per week.
Calculate the price elasticity of supply if the price increases from $1 to $1.20. Show your work.
- One point is earned for correctly calculating the price elasticity of supply.
Students can use either the midpoint formula or the point elasticity formula.
Between $1 and $1.20, is the supply elastic, unit elastic, or inelastic? Explain.
- One point is earned for stating that the supply is elastic and for explaining that the percentage change in quantity supplied exceeds the percentage change in price or because price elasticity of supply is greater than one. (Other equivalent explanations are accepted.)