CA Foundation · Business Economics · Theory of Demand and Supply
Supply of a good is Qs = 20P. The price rises from ₹10 to ₹15. Using the arc (mid-point) method, what is the elasticity of supply between these two prices?
The arc elasticity of supply is 1.00. Quantity rises from 200 to 300 as price goes from ₹10 to ₹15. Multiplying the slope 20 by the sum of prices 25 over the sum of quantities 500 gives one, consistent with a supply line through the origin.
- A1.00Correct
- B1.50
- C0.67
- D0.50
Explanation
At P = 10, Q = 200; at P = 15, Q = 300. Arc elasticity = (ΔQ/ΔP) x (P1+P2)/(Q1+Q2) = (100/5) x (25/500) = 20 x 0.05 = 1.0. This agrees with the property that a straight line through the origin has unit elasticity. Using the initial-value method gives 50/50 = 1 too, but using ΔP/ΔQ inverted would give the wrong 0.67-type values.
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