Question

The price of a good rises from \(16 to \)24, and the quantity supplied rises from 90 to 110 units. Calculated with the midpoint method, the price elasticity of supply is

a. 1/5.

b. 1/2.

c. 2.

d. 5.

Short answer

Option b is the correct answer. With the help of the midpoint method, the price elasticity of supply is 1/2 if the price of the good increases from $16 to $24 and the quantity supplied from 90 to 110 units.

Step-by-step solution

Midpoint method for price elasticity of supply

If the price elasticity of demand between two points is denoted as (P1, Q1) and (P2, Q2), then the formula for the price of elasticity of supply as per the midpoint method is

Percentage of change in quantity=$\frac{Q2-Q1}{\left(Q1+Q2\right)/2}\times 100$

Percentage of change in price= $\frac{P2-P1}{\left(P1+P2\right)/2}\times 100$

Price elasticity of supply = $\frac{percentageofchangeinquantitysupplied}{percentageofchangeinprice}$

Explanation for the correct answer b

The price of a good rises from $16 to $24.

The percentage of change in price$=\frac{\left(24-16\right)}{20}\times 100=40percent$

The quantity supplied rises from 90 to 110 units.

The percentage of change in quantity supplied $=\frac{\left(110-90\right)}{100}\times 100=20percent$

Thus, the price elasticity of supply

$$\begin{gathered} =\frac{percentageofchangeinquantitysupplied}{percentageofchangeinprice} \\ =\frac{20}{40}=\frac{1}{2} \end{gathered}$$