When the price of a good falls from Rs. 40 to Rs 30, the total revenue earned by the firm falls from Rs. 4000 to Rs. 2700. find price elasticity of supply for the good.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → 0.4
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Initial price, P₁ = Rs. 40
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New price, P₂ = Rs. 30
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Initial total revenue, TR₁ = Rs. 4000
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New total revenue, TR₂ = Rs. 2700
Under perfect competition or for a single good, Total Revenue (TR) = Price (P) × Quantity (Q)
Q₁ = TR₁ / P₁ = 4000 / 40 = 100 units
Q₂ = TR₂ / P₂ = 2700 / 30 = 90 units
Change in quantity supplied = 90 − 100 = −10 units
Change in price = 30 − 40 = −10
Percentage change in quantity = (ΔQ / Q₁) × 100 = (−10 / 100) × 100 = −10%
Percentage change in price = (ΔP / P₁) × 100 = (−10 / 40) × 100 = −25%
Elasticity of supply (Es) = (% change in quantity supplied) / (% change in price)
Es = (−10%) / (−25%) = 0.4