question archive 1)Suppose that in a week the price of Greek yogurt increases from $5
Subject:EconomicsPrice:4.88 Bought18
1)Suppose that in a week the price of Greek yogurt increases from $5.00/lb to $5.25/lb. At the same time, the quantity of Greek yogurt supplied increases from 100,000lbs to 125,000lbs. What is the price elasticity of supply for Greek yogurt?
2)Recently, the Federal Communications Commission (FCC) implemented "local number portability" rules allowing cellular phone consumers to switch cellular providers within the same geographic area and maintain the same phone number. How would you expect this change to affect the Rothschild index for the cellular service industry?
3)How is the price elasticity of supply calculated? Explain what it measures.
1)Price elasticity of supply is the ratio of the percentage change in quantity supplied to the percentage change in the price of a commodity.
Es = Percentage change in quantity supplied/ Percentage change in price
Es= percent change in q / percent change in p
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Now, we will put given values in the equation above:
Change in quantity supplied = 125000 lbs - 100000 lbs = 25000 lbs. Percent change = 25,000 / 100,000 = 0.25 = 25%
Change in price (per lb) = $5.25 - $5.00 = $0.25. Percent change = 0.25 / 5.00 = 0.05 = 5%
Es = 25% / 5% = 5
Es = 5
This means that if the price of Greek yogurt increases by one percent, the supply of Greek yogurt will increase by 5%.
2)When the Federal Communications Commission (FCC) implemented the "local number portability" rule, it increases the competition from substitutes. After the rule, the different service providers become close substitute for each other. Not only this, the competition among rival firms also get intense because of increased chances of switching out of reduced cost of switching. With these factors, the demand for cellular services, of individual firms, become more elastic than before. With same change in price, the demand of a firm will be influenced more than before. However, the total demand of the industry will not likely to get affected much.
We know that the Rothschild index is calculated by dividing the total industry demand elasticity with individual firm's demand. In other words, the formula is -
R = Et / Ef
Where R is the index, Et is elasticity of industry and Ef is individual firm's demand elasticity.
Now, as stated above, the individual firm's demand elasticity will increase but the industry's demand elasticity will not be affected much. the denominator will increase more than the numerator. This will cause a decline in the index.
Hence, due to the policy, the Rothschild index will reduce.
3)please see the attached file for the complete solution.