Answer to Question #106065 in Microeconomics for Corinne C.

Question

3. The market for bananas, muffins, and coffee are interrelated, and each market is
perfectly competitive.
a. In the market for bananas, the equilibrium price is $1.00 per pound, and the
equilibrium quantity is 1000 pounds per week. Suppose the government imposes a price
floor on bananas at $1.20 per round causing the quantity supplied to increase to 1500
pounds per week.
i. Would the price floor result in a shortage, a surplus, or neither? Explain.
ii. Calculate the price elasticity of supply if the price increases from $1 to
$1.20. Show your work.
iii. Between $1 and $1.20, is the supply elastic, unit elastic, or inelastic?

Answer 1

3.i

At higher price(1.20) there are smaller quantity demanded and bigger quantity supplied (low of supply and demand), so there will be a surplus.

3.ii

Price elasticity = change in quantity/ change in price

So we can calculate 500/0.20= 2500.

3.iii

If price elasticity is greater that 1, that means that it's elastic. So between 1 $ and 1.20 $ supply is elastic.