ADVANCED ANALYSIS Currently, at a price of $2 each, 100 popsicles are sold per d

Question

ADVANCED ANALYSIS Currently, at a price of $2 each, 100 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 $2 to $4 is unit-elastic (Es 1). In the long run, a price increase from $2 to $4 has an elasticity of supply of 1.50. (Hint: Apply the midpoints approach to the elasticity of supply.) Instructions: Enter your answers as whole numbers. a. How many popsicles will be sold each day in the short run if the price rises to $4 each? per day b. So how many popsicles will be sold per day in the long run if the price rises to $4 each? per day

Explanation / Answer

Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price.

a) 167 popsicles

In the short run

Price rises from $2 to $4.

Change in price = 4-2 = $2

Base for calculating percentage change = $4+$2/2 = $3

Percentage change in price = $2/$3*100 = 66.67%

Now,

Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price.

Elasticity of Supply = 1 (as given)

1 = Percentage change in quantity supplied / 66.67%

Percentage change in quantity supplied = 66.67%

Thus the quantity supplied will increase by 66.67%. Thus new quantity sold = 100+66.67% of 100 = 166.67

Thus 167 popsicles.

b) 200 popsicles

Here, the elasticity of supply is 1.5

Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price.

1.5 = Percentage change in quantity supplied / 66.67%

Percentage change in quantity supplied = 100%

Thus the quantity supplied will increase by 100%. Thus new quantity sold = 100+100% of 100 = 200

Thus 200 popsicles.

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