Final answer:
When the price elasticity of supply is 1.2 and the price increases by 5%, the quantity supplied is expected to increase by 6%. This is because the elasticity of 1.2 indicates that supply is elastic, responding more than proportionately to price changes.
Step-by-step explanation:
If the price elasticity of supply is 1.2, and the price increases, we expect to see a change in the quantity supplied. An elasticity greater than 1 indicates that the supply is elastic, meaning that suppliers are responsive to price changes.
In case of a 5% price increase, for example, we can use the elasticity of supply to predict the percentage change in the quantity supplied. Since the elasticity is 1.2, the percentage change in quantity supplied would be 1.2 times the percentage change in price.
To calculate this, we would multiply the 5% price increase by the elasticity of supply (1.2). This results in a 6% increase in the quantity supplied (5% * 1.2 = 6%).
If the current quantity supplied is 100 units, then after the price increase, we can expect the quantity supplied to be 106 units (100 units + 6% of 100 units).