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?
Initial price, P1 = Rs 10
Initial output, Q1 = 4 units
Final price, P2 = Rs 30
∆P = P2 – P1
= Rs 30 – 10 = Rs 20
Elasticity of supply es = 1.25
es =
1.25 =
= 1.25 × 8 = ∆Q
= ∆Q = 10 units
Thus final output supplied, Q2 = ∆Q + Q1
Q2 = 10 + 4 = 14 units
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