Elasticity of supply Application & problem solving S. You are told that a 10 per

Question

Elasticity of supply Application & problem solving S. You are told that a 10 percent iacrease in the price of a good has led to a 1 percent increase in the quantity supplied of the good after one month. Use this information to answer the following questions: 1. How would you describe the supply of this good? 2. What can you say about the production possibilities of this good? 3. Calculate the price elasticity of supply. If after one year, the quantity supplied has increased by 25 percent, describe how the supply changed over the year. 4. 5. Calculate the price elasticity of supply after one year. Page 3

Explanation / Answer

1)The supply of a given product is inelastic if the percentage rise in the quantity supplied is lower than the percentage rise in the price. In the given case, a 10 % price increase leads to a 1 % rise in the quantity supplied, hence, we can say that the supply is inelastic.

2) As the quantity supplied of the given product has risen by a minute percentage after 1 month, we can conclude that ,the factors pf production that are being utilized to manufacture this product are probably not easily obtainable.

3)The elasticity of supply is equivalent to ( % change in the amount supplied) divided by ( % alteration in the price), i.e., 1 ÷ 10 = 0.1.

4) The supply of the given product has become more elastic during the year post the price increase. Possibly other firms have gradually begun manufacturing the product & with time there has been a reallocation of the factors of production .

5) Post 1 year, the elasticity of supply is (25 ÷ 10 )which is equivalent to 2.5.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.