Question

3. The market for bananas, muffins, and coffee are interrelated, and each market is

perfectly competitive.

a. In the market for bananas, the equilibrium price is $1.00 per pound, and the

equilibrium quantity is 1000 pounds per week. Suppose the government imposes a price

floor on bananas at $1.20 per round causing the quantity supplied to increase to 1500

pounds per week.

i. Would the price floor result in a shortage, a surplus, or neither? Explain.

ii. Calculate the price elasticity of supply if the price increases from $1 to

$1.20. Show your work.

iii. Between $1 and $1.20, is the supply elastic, unit elastic, or inelastic?

Answer 1

3.i

At higher price(1.20) there are smaller quantity demanded and bigger quantity supplied (low of supply and demand), so there will be a surplus.

3.ii

Price elasticity = change in quantity/ change in price

So we can calculate 500/0.20= 2500.

3.iii

If price elasticity is greater that 1, that means that it's elastic. So between 1 $ and 1.20 $ supply is elastic.