At a price of $300, a cell phone company manufactures 100,000 phones

Economics Dec 23, 2020

At a price of $300, a cell phone company manufactures 100,000 phones. At a price of $400, the company produces 300,000 phones. What is the price elasticity of supply? (Round your answer to two decimal places.)

Expert Solution

We can use the mid-point method to compute the price elasticity. The percentage change in price is:

(400 - 300) / ((400 + 300) / 2) = 0.286

The percentage change in quantity supplied is:

(300,000 - 100,000) / ((300,000 + 100,000) / 2) = 1

The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price, i.e.,

1 / 0.286 = 3.5

Price Elasticity of Supply:

The price elasticity of supply measures the sensitivity of quantity supplied with respect to price. By the law of supply, the price elasticity of supply is always positive.

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