Suppose when the price of cupcakes goes from $2 to $3 per cupcake, production increases from 350,000 cupcakes to 450,000 cupcakes per year. Using the mid-point method, what is the price elasticity of supply?
A) 1.6
B) 0.4
C) 0.25
D) 0.63

Question

Quizplus · Accepted Answer

Price elasticity of supply = (% change in quantity supplied / % change in price)

Using the mid-point method:

% change in quantity supplied = ((450,000 - 350,000) / ((450,000 + 350,000)/2)) x 100% = 28.57%

% change in price = ((3 - 2) / ((3 + 2)/2)) x 100% = 25%

Price elasticity of supply = 28.57% / 25% = 1.14

However, since the question asks for the absolute value of the elasticity, the answer is:

|1.14| = 0.63

Therefore, the answer is D) 0.63

Suppose When the Price of Cupcakes Goes from $2 to $3