Question

Consider two markets: the market for motorcycles and the market for pancakes. The initial equilibrium for both markets is the same, the equilibrium price is
$
6.50
, and the equilibrium quantity is
27.0
. When the price is
$
10.75
, the quantity supplied of motorcycles is
61.0
and the quantity supplied of pancakes is
109.0
. For simplicity of analysis, the demand for both goods is the same.

Using the midpoint formula, calculate the elasticity of supply for pancakes. Please round to two decimal places.


Supply in the market for motorcycles is

There is not enough information to tell which has a higher elasticity.

less elastic than supply in the market for pancakes.

the same elasticity as supply in the market for pancakes.

more elastic than supply in the market for pancakes.

Answer 1

Answer:

1. PES for pancakes is 2.45

2. Supply in the market for motorcycles is  less elastic than supply in the market for pancakes.

Explanation:

Price elasticity of supply is the responsiveness of quantity supplied to a change in price. it is calculated by dividing the % change in quantity supplied by the % change in price. Generally, it can be of two types:

1. Price Elastic: Change in quantity supplied is higher than change in price. PES > 1
2. Price Inelastic: Change in quantity supplied is lower than change in price. PES < 1

When calculated using the mid-point formula, this is the formula used:

(Q2 - Q1) / [(Q2 + Q1)/2]

(P2 - P1) / [(P2 + P1)/2]

1. We will now substitute the actual values of pancakes in place after identifying them from the question:

Equilibrium Quantity - 27 (Q1)

New Quantity - 109 (Q2)

Equilibrium Price - $6.50 (P1)

New Price - $10.75 (P2)

(109 - 27) / [(109 + 27)/2]

(10.75 - 6.50) / [(10.75 + 6.50)/2]

1.21

0.493

Therefore, PES for pancakes is 2.45 (approx. two decimal places) suggesting it is price elastic.

2. In order to check whether motorcycles or pancakes are more elastic, we calculate the PES of motorcycles using the same method:

Equilibrium Quantity - 27 (Q1)

New Quantity - 61 (Q2)

Equilibrium Price - $6.50 (P1)

New Price - $10.75 (P2)

(61 - 27) / [(61 + 27)/2]

(10.75 - 6.50) / [(10.75 + 6.50)/2]

0.77

0.493

Therefore, PES for motorcycles is 1.56 (approx. two decimal places) suggesting it is price elastic. However, it is less price elastic than PES for pancakes.

One reason for this could be production time. Pancakes can be produced much faster than motorcycles. Therefore, it is more flexible to price changes.