Question

Suppose the price elasticity of supply for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, the quantity supplied of gasoline will|?

Answer 1

Answer:

increase by 8 percent

Explanation:

Price elasticity of supply of a product is the degree of responsiveness of supply of that product to a change in price. Simply put:

Price Elasticity of supply = change in quantity supply/ change in price.

In this case, price elasticity of supply of gasoline = 0.4

Percentage price increase = 20 percent.

Hence,

           0.4 = change in supply/20

           Change in supply = 20 x 0.4 = 8 percent

Therefore, the quantity supply of gasoline will increase by 8 percent