The estimated equation for the Japanese Densuke Watermelon supply curve is Q = 100 + 0.8 p
where p is the price in dollars per kilogram and Q is the quantity supplied in tons per year. What is the price elasticity of supply at the points on the supply curve where the prices are p = $10 , p = $20, p = $200, and p = $500 and p → $∞ per kg? Draw the supply curve and show these elasticities on the diagram.
Solution:
Price elasticity of supply = "\\frac{\\partial Q} {\\partial P}\\times \\frac{P}{Q}"
"\\frac{\\partial Q} {\\partial P}" = 0.8
When P = 10: Q = 100 + 0.8(10) = 100 + 8 = 108
Price elasticity of supply = "0.8\\times \\frac{10} {108} = 0.07"
When P = 20: Q = 100 + 0.8(20) = 100 + 16 = 116
Price elasticity of supply = "0.8\\times \\frac{20} {116} = 0.14"
When P = 200: Q = 100 + 0.8(200) = 100 + 160 = 260
Price elasticity of supply = "0.8\\times \\frac{200} {260} = 0.62"
When P = 500: Q = 100 + 0.8(500) = 100 + 400 = 500
Price elasticity of supply = "0.8\\times \\frac{500} {500} = 0.8"
When P = ∞: Price is constant at any given quantity
Price elasticity of supply = ∞
This is depicted by the below supply curve showing the price elasticity of supplies:
Comments
Leave a comment