Suppose that an increase in the price of melons from $1.30 to $1.80 per pound increases the quantity of melons that melon farmers produce from 1.2 million pounds to 1.6 million pounds.Using the midpoint method,what is the approximate value of the price elasticity of supply?
A)0.67
B)0.89
C)1.00
D)1.13

Question

Quizplus · Accepted Answer

The midpoint method formula for price elasticity of supply is:

% change in quantity supplied = [(Q2 - Q1) / ((Q1 + Q2)/2)] x 100%
% change in price = [(P2 - P1) / ((P1 + P2)/2)] x 100%

Using the given values, we get:

% change in quantity supplied = [(1.6 - 1.2) / ((1.2 + 1.6)/2)] x 100% = 33.33%
% change in price = [(1.8 - 1.3) / ((1.3 + 1.8)/2)] x 100% = 38.46%

Therefore, the price elasticity of supply is:

|Elasticity| = % change in quantity supplied / % change in price

|Elasticity| = 33.33% / 38.46% ≈ 0.867 ≈ 0.89 (rounded to two decimal places)

Since elasticity is always positive, we can ignore the absolute value sign and round the answer to 0.89. This suggests that the supply of melons is relatively elastic, meaning that producers are relatively responsive to changes in price.

Suppose That an Increase in the Price of Melons from $1.30