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Currently, at a price of $1 each, 250 popsicles are sold per day in the perpetually hot town of Rostin
Currently, at a price of $1 each, 250 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit-elastic (Es = 1). In the long run, a price increase from $1 to $2 has an elasticity of supply of 1.50. How many popsicles will be sold each day in the short run if the price rises to $2 each? So how many popsicles will be sold per day in the long run if the price rises to $2 each?
Expert Solution
In the short run, supply is unit elastic, so increasing the price from $1 to $2 implies a (2-1)/(2+1)/2 = 67% (using the mid-point method) increase in price, and quantity supplied will increase by 67% as well, so the new output is 250*(1 + 67%) = 417.5.
In the long run, supply is elastic, so increasing the price from $1 to $2 implies a (2-1)/(2+1)/2 = 67% (using the mid-point method) increase in price, and quantity supplied will increase by 67%*1.5 = 100.5% as well, so the new output is 250*(1 + 100.5%) = 501.25.
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