At a price of $4 per unit, Gadgets Inc. is willing to supply 20,000 gadgets, while United Gadgets is willing to supply 10,000 gadgets. If the price were to rise to $8 per unit, their respective quantities supplied would rise to 45,000 and 25,000. If these are the only two firms supplying gadgets, what is the elasticity of supply in the market for gadgets?
A)1.2
B)1
C)0.83
D)0.8

Question

Quizplus · Accepted Answer

The elasticity of supply is calculated using the formula: percentage change in quantity supplied / percentage change in price. The total quantity supplied at $4 is 30,000 units (20,000 + 10,000), and at $8 is 70,000 units (45,000 + 25,000). The percentage change in quantity supplied is [(70,000 - 30,000) / 30,000] * 100 = 133.33%. The percentage change in price is [($8 - $4) / $4] * 100 = 100%. Therefore, the elasticity of supply is 133.33% / 100% = 1.33. However, since this option is not available, it seems there was a mistake in my calculation. Recalculating properly: The correct percentage change in quantity supplied is (70,000 - 30,000) / 30,000 = 1.33 or 133.33%, and the percentage change in price is ($8 - $4) / $4 = 1 or 100%. The elasticity of supply = 1.33 / 1 = 1.33. Given the options, it appears there was an error in my initial explanation, as none of the options exactly match this result. Correcting for the proper approach to calculate elasticity, which involves the formula [(Q2 - Q1) / (Q2 + Q1)] / [(P2 - P1) / (P2 + P1)], where Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices, respectively. Applying this formula correctly: [(70,000 - 30,000) / (70,000 + 30,000)] / [($8 - $4) / ($8 + $4)] = (40,000 / 100,000) / (4 / 12) = 0.4 / 0.333 = 1.2. Therefore, the correct elasticity of supply is 1.2, which matches option A.

At a Price of $4 Per Unit, Gadgets Inc