Question

A price elasticity of supply of 0.50 means that if the price decreases by 1%, the quantity supplied will ______________ by _____________%.

a) Increase, 0.50%
b) Decrease, 0.50%
c) Increase, 1%
d) Decrease, 1%

Answer 1

The price elasticity of supply being 0.50 means a 1% decrease in price results in a 0.50% decrease in quantity supplied.

Step-by-step explanation:

A price elasticity of supply of 0.50 means that if the price decreases by 1%, the quantity supplied will decrease by 0.50%. Price elasticity of supply measures how responsive the quantity supplied is to a change in price. A price elasticity of supply of 0.50 indicates that supply is inelastic, meaning that price changes will result in proportionally smaller changes in the quantity supplied.

So, the correct answer is (b) Decrease, 0.50%. Price elasticity of supply measures how the quantity supplied of a good is affected by a change in price. In this case, since the elasticity of supply is less than one, it is considered relatively inelastic, which means that suppliers will not change their quantity supplied by a large amount in response to a price change. Therefore, a decrease in price leads to a proportionally smaller decrease in the quantity supplied.