Question

Suppose the price of tablets increases by 8 percent and producers respond by increasing the quantity supplied by 20 percent. The price elasticity of supply for tablets is: a) 0.4 and producers are very responsive to the price change. b) 0.4 and producers are not responsive to the price change. c) 2.5 and producers are very responsive to the price change. d) 2.5 and producers are not responsive to the price change.

Answer 1

Answer:

The answer is: C) 2.5 and producers are very responsive to the price change.

Explanation:

The price elasticity of supply refers to what percentage does the quantity supplied change when the price of the good changes in 1%. It is calculated using the following formula:

• price elasticity = % change in quantity supplied / % change in price

Price elasticity of supply of tablets = 20% / 8% = 2.5

For every 1% that the price increases, the quantity supplied will increase by 2.5%.

Since PES > 1, the supply is very price elastic.