Question

Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms, _________.a. market power is substantial. b. supply is perfectly inelastic. c. supply is more elastic at low levels of output and less elastic at high levels of output. d. supply is less elastic at low levels of output and more elastic at high levels of output.

Answer 1

Answer:

C) supply is more elastic at low levels of output and less elastic at high levels of output.

Explanation:

Price elasticity of supply shows how firms react to a change in the price of a product. If the price elasticity of supply is high, the firms will be willing to increase production in a proportionally higher quantity than the increase in price. As the supply elasticity reduces, firms will be less willing to increase production when the price increases.

In this case, if the supply elasticity was high when the level of output was low, then the firm was willing to increase output more than the price increase. But as the supply elasticity decreased, since total output had already increased, the firm is less willing to increase production when the price changes.