At a price of rs.5 per unit of commodity A, total revenue is rs. 800.when its price rises by 20% total revenue increases by rs 400, calculate its price elasticity of supply?
Answers
Explanation:
Elasticity of supply =
(change in quantity/change in price× original price/original quantity)
40/1 × 5/160
elasticity of supply = 1.25
To find : price elasticity of supply
Using percentage method
Explanation:
commodity of A =
price of 5per unit =
Total revenue = 800
Price rise by 20% = 20% of 5
= 20/100×5
= 1
rise in price = 1 + 5 = 6
Increase in total revenue = by 400
= 800+400 = 1200
Total revenue = TR = P × Q
TR / P = Q
800/5 = 160 ( for 5 per unit)
1200/6 = 200( 6 per unit)
Elasticity of supply (E) = %Δ in Q / %Δ in P
Δ price = new price - original price
= 6-5 = 1
%Δ in P = ΔP/P× 100%
= (1/5)×100 = 20%
ΔQty = new qty - orig qty
= 200 - 160
ΔQ = 40
%Δ in Q = ΔQ/Q × 100%
= 40/160 × 100% = 25%
E = 25% / 20%
= 25 / 20 = 5 / 4
E = 1.25
Answer = 1.25