When a manufacturer produces 25 tables, the marginal and average costs are both equal to $50 per table. A 26th table raises the marginal cost to $54 per table and the average cost to $52 per table. What is the firm's elasticity of supply when 25 table are produced?

Question

Quizplus · Accepted Answer

The elasticity of supply can be calculated as the percentage change in quantity supplied divided by the percentage change in price. Since the price remains constant at $50 per table when the manufacturer produces 25 tables, the percentage change in price is zero. When the 26th table is produced, the quantity supplied increases by 1, or 4% from 25 to 26 tables. The percentage change in quantity supplied is therefore 4%. Using the midpoint method, the average quantity supplied is (25+26)/2 = 25.5. The average marginal cost of the 26 tables is ($50*25 + $54)/26 = $51. Meanwhile, the average cost of producing the same 26 tables is ($50*25 + $54)/26 = $52. Thus, the percentage change in cost from producing 25 to 26 tables is (52-50)/50 = 4%. Therefore, the elasticity of supply is (4%/50%) = 0.08 or 1/12 which is equal to 0.5 when calculated with the negative exponent, i.e, 2^(-1) = 0.5. So, the answer is B: 1/2.

When a Manufacturer Produces 25 Tables, the Marginal and Average