CA Foundation · Business Economics · Theory of Demand and Supply
A supply schedule is linear: at ₹20 per unit, 100 units are supplied, and at ₹30 per unit, 140 units are supplied. Using the midpoint approach that uses the average of the prices and quantities, what is the price elasticity of supply between these two points?
Using midpoint values, quantity changes by 40 on an average of 120 (33.3%), and price changes by 10 on an average of 25 (40%). Elasticity is 0.333 divided by 0.4, about 0.83, so the closest option is 0.80, meaning inelastic supply.
- A1.33
- B1.00
- C1.70Correct
- D0.80
Explanation
Change in Q = 40, average Q = 120, so percentage change = 40/120 = 1/3. Change in P = 10, average P = 25, so 10/25 = 0.4. Elasticity = (1/3)/0.4 = 0.833... wait the ratio should be computed as (40/120)÷(10/25) = 0.3333÷0.4 = 0.83, which is closest to 0.80 as listed.
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