Question

If the price elasticity of supply is 0.6, and a price increase led to a 3.7 percent increase in quantity supplied, then the price increase is about a. 5.17 percent. b. 2.22 percent. c. 6.17 percent. d. 0.16 percent

Answer 1

Answer: The price increase is about 6.17 percent.

Explanation:

The price elasticity of supply (PES) is the elasticity of the quantity supplied of a product to its price change. Price elasticity of supply is the ratio of the percentage change in the quantity supplied of a good or service to the percentage change in price.

The Price Elasticity of Supply is positive as a result of the law of supply that states that there's a direct relationship between the quantity supplied and price i.e. a price increase leads to an increase in quantity supplied and vice versa.

To solve the question,

PES = 0.6

% change in quantity supplied = 3.7

% change in price = Unknown

Let percentage change in price be denoted by b.

PES = % change in quantity demanded / % change in price

0.6 = 3.7 / b

Cross multiplying,

b = 3.7 / 0.6

b = 6.17

Recall that b is the percentage change on price.

Therefore, the percentage change in price is 6.17.