At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 20. The price elasticity of the firms' supply is 1.25. What quantity will the firm supply at the new price?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: 9 units
Assume new quantity to be x.
Applying formula of elasticity, (Change in quantity/Change in price)*( Initial price/Initial quantity) = Price elasticity of supply,
we get 1.25 = (x-4/10)*(10/4).
Solving this equation for x, we get x -9.
So, 9 units of quantity will be supplied at the new price.