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Question 4: Price Elasticity of Supply

The midpoint formula for calculating the price elasticity of supply ($E_s$) is: $E_s = \frac{\left(\frac{\Delta Q}{\text{Average } Q}\right)}{\left(\frac{\Delta P}{\text{Average } P}\right)}$ where:

• $\Delta Q$ is the change in quantity supplied,
• $\Delta P$ is the change in price,
• Average $Q$ is the average of the initial and new quantities,
• Average $P$ is the average of the initial and new prices.

Given:

• The initial price ($P_1$) = $0.50
• The new price ($P_2$) = $0.60
• Percentage change in quantity supplied = 25%

Step 1: Calculate the midpoint price

$\text{Average Price} = \frac{P_1 + P_2}{2} = \frac{0.50 + 0.60}{2} = 0.55$

Step 2: Calculate the percentage change in price

$\Delta P = P_2 - P_1 = 0.60 - 0.50 = 0.10$ \text{Percentage change in price} = \frac{\Delta P}{\text{Average Price}} = \frac{0.10}{0.55} \approx 0.1818 \text{ or 18.18%}

Step 3: Use the midpoint method formula

$E_s = \frac{25\%}{18.18\%} \approx 1.38$

So, the correct answer is:

• Elastic, since elasticity is equal to 1.38

Question 5: Tax Division Between Buyers and Sellers

To determine the market where the tax is most equally divided, we need to examine the elasticities of the demand and supply curves in each diagram:

1. In market (a), the supply and demand curves appear to have similar slopes, indicating a more equal division.
2. In market (b), the curves are also close in slope, suggesting similar elasticity.
3. In market (c), one of the curves is much steeper than the other, implying an unequal division.
4. In market (d), a similar situation occurs as in (c).

Hence, the tax will be most equally divided between the buyer and the seller in markets (a) and (b).

Let me know if you need more details or have further questions!

Related Questions:

1. How does the midpoint method differ from other elasticity calculation methods?
2. What are the implications of a price elasticity of supply greater than 1?
3. How do elasticity values affect tax incidence in different markets?
4. Can elasticity influence a firm's production decisions in the long run?
5. What factors might cause a shift in the supply or demand curve?

Tip:

When calculating elasticity, always check if you're using percentage changes or actual values, as different formulas apply to each case.