Final answer:
The elasticity of a firm's supply depends on its ability to respond to price changes. In a constant cost industry, supply is likely to be elastic; in an increasing cost industry, it is likely to be inelastic; and in a decreasing cost industry, it is likely again to be elastic.
Option 'a' is the correct.
Step-by-step explanation:
The elasticity of a firm's supply relates to how much the quantity supplied by the firm changes in response to a change in price. If a firm's supply is elastic, it implies that the firm can adjust production levels significantly in response to price changes. An inelastic supply indicates that the firm's production does not change much in response to price changes.
Looking at the cost scenarios provided:
- (a) Under constant cost, when demand increased, the supply could perfectly match it, keeping the equilibrium price static. This suggests a perfectly elastic scenario where supply can adjust to changes in demand without affecting prices.
- (b) In the case of an increasing cost industry, supply could not keep up with the increased demand. This implies that the supply is inelastic as producers are unable to respond adequately to price changes due to increasing costs such as wages or scarce inputs.
- (c) In the decreasing cost scenario, technology or economies of scale enable a significant increase in supply. This results in a higher elasticity as supply can increase more than the increase in demand, causing the equilibrium price to fall.
Given this information, if the question refers to a firm within a constant cost industry as described in scenario (a), the firm's supply is likely to be considered elastic, since supply increases proportionally with demand without a change in equilibrium price. If it refers to an increasing cost industry (b), the firm's supply would be inelastic, as costs restrict the firm's ability to increase supply to meet demand. Lastly, if it pertains to a decreasing cost industry (c), we could again consider supply as elastic because new technologies or efficiencies allow firms to greatly increase supply and lower the equilibrium price in response to increased demand.