Question

Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product.
A) 2; The product is elastic.
B) 0.2; The product is inelastic.
C) 0.5; The product is inelastic.
D) 50%; The product is inelastic.

Answer 1

Answer:

C) 0.5; The product is inelastic.

Explanation:

Elasticity of supply measures the responsiveness of quantity supplied to changes in price.

Elasticity of supply = percentage change in quantity supplied / percentage change in price

Elasticity of supply = 2% / 4% = 0.5

When the coefficient of elasticity of supply is less than one, supply is inelastic.

Inelastic supply means that a change in price would have little or no effect on the quantity supplied.

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