A firm supplies 500 units of a good at a price of 75 per uni

A firm supplies 500 units of a good at a price of 75 per unit. The price elasticity of supply of a good is 2. At what price will the firm supply 700 units?

Solution

Initial price = 5 per unit

Initial quantity supplied = 500 units

Price elasticity of supply = 2

New quantity supplied = 700 units

Calculate the percentage change in quantity supplied -

Percentage change = [(new quantity supplied - Initial quantity supplied)/Initial quantity supplied] * 100

Percentage change = [(700 - 500)/500] * 100 = 40%

As we know that,

Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price

2 = 40/Percentage change in price

Percentage change in price = 20

So, price has to be increased by 20%.

Initial price = 5 per unit

Increase in price = 5 * 0.20 = 1

New price = 5+1 = 6

So,

The firm will supply 700 units at 6 per unit.