Assume a good where its equilibrium price is 40 and its equilibrium quantity is

Question

Assume a good where its equilibrium price is 40 and its equilibrium quantity is 3.0 units. Compute the supply surplus when price is 60. Take into consideration that the elasticity of supply is 1 and the elasticity of demand (-1). Assume a good where its equilibrium price is 40 and its equilibrium quantity is 3.0 units. Compute the supply surplus when price is 60. Take into consideration that the elasticity of supply is 1 and the elasticity of demand (-1). Assume a good where its equilibrium price is 40 and its equilibrium quantity is 3.0 units. Compute the supply surplus when price is 60. Take into consideration that the elasticity of supply is 1 and the elasticity of demand (-1).

Explanation / Answer

Ans:

Demand and supply elasticies are equal to 1 or unity.

Elasticity of supply = (Change in supply /Change in price)*P/Q

      (Q/20)*40/3=1

40Q =60

Q=1.5

Hence supply shall be surplus by 1.5 units from equilibrium quantity and demand will be reduced by 1.5 units

Overall supply shall be surplus by 3 units

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