A 10 percent increase in the price of a good increased the quantity supplied of
ID: 1131816 • Letter: A
Question
A 10 percent increase in the price of a good increased the quantity supplied of the good by 1 percent after one month and by 25 percent after one year. 1. Is the supply of this good elastic, unit elastic, or inelastic? Is this good likely to be produced using factors of production that are easily obtained? What is the price elasticity of supply of this good? (12 Marks) 2. What is the price elasticity of supply after one year? Has the supply of this good become more elastic or less elastic? Why? (8Marks) [Total 20 Marks]
Explanation / Answer
Q. 1)
Answer: inelastic
Price elasticity of supply = % change in quantity supply / % change in price
= 1% / 10%
= 0.1
Since it is less than 1, the supply becomes inelastic.
Yes. Factors of production are land, labor, capital, and organization. Normal rule of supply is increasing price increases quantity supply. But it is not happening here, since the good has inelastic supply. It indicates poor facilities of production, which could be removed by obtaining easily available factors.
The price elasticity of supply is 0.1.
Q. 2)
Answer: elastic (after 1 year)
Price elasticity of supply = % change in quantity supply / % change in price
= 25% / 10%
= 2.5
Since it is more than 1, the supply becomes elastic.
It becomes more elastic, because production facilities (factors) become easy. The factors are easily available in the market, which are used to have increasing production keeping with the pace of increasing price.
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