Question

Price Quantity Supplied

$1
4 units
$2
6 units
$3
8 units
$4
10 units
Based on the supply schedule above, which of the following is true of the product's price elasticity of supply?
OIt is violating the law of supply.
More information is needed.
It is -0.6 when increasing from $1 to $2.
O It is 1.5 when increasing from $2 to $3.
O It is 0.75 when increasing from $3 to $4.

Answer 1

The price elasticity of supply (PES) measures how responsive the quantity supplied of a good is to a change in its price. PES is calculated as the percentage change in quantity supplied divided by the percentage change in price.

In this case, we can calculate PES for each price change:

1. From $1 to $2: PES = ((6 - 4) / 4) / ((2 - 1) / 1) = 0.5

2. From $2 to $3: PES = ((8 - 6) / 6) / ((3 - 2) / 2) = 1

3. From $3 to $4: PES = ((10 - 8) / 8) / ((4 - 3) / 3) = 0.75

The correct statement is, "It is 0.75 when increasing from $3 to $4." This indicates that a 1% increase in price results in a 0.75% increase in quantity supplied, showing a relatively inelastic supply response to changes in price in this price range.