A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
The price elasticity of the firm's supply curve is 2.
Explanation
This numerical problem tests the student's understanding of price elasticity of supply formula. The key insight is that Total Revenue = Price × Quantity, so we can derive quantities from the given revenue and price data. Once we have both prices and quantities, we apply the standard elasticity formula from the textbook.
Solution Steps
Step 1: Calculate Initial Quantity (Q₁) Given: Total Revenue (TR₁) = Rs 50, Price (P₁) = Rs 10 Q₁ = TR₁/P₁ = 50/10 = 5 units
Step 2: Calculate Final Quantity (Q₂) Given: Total Revenue (TR₂) = Rs 150, Price (P₂) = Rs 15 Q₂ = TR₂/P₂ = 150/15 = 10 units
Step 3: Calculate Percentage Change in Quantity Supplied ΔQ = Q₂ - Q₁ = 10 - 5 = 5 units Percentage change in quantity = (ΔQ/Q₁) × 100 = (5/5) × 100 = 100%
Step 4: Calculate Percentage Change in Price ΔP = P₂ - P₁ = 15 - 10 = Rs 5 Percentage change in price = (ΔP/P₁) × 100 = (5/10) × 100 = 50%
Step 5: Calculate Price Elasticity of Supply Price elasticity of supply (eS) = Percentage change in quantity supplied / Percentage change in price eS = 100/50 = 2