Holding all other factors constant and using the midpoint method,if a pencil manufacturer increases production by 20 percent when the market price of pencils increases from $0.50 to $0.60,then supply is
A) inelastic,since the price elasticity of supply is equal to .91.
B) inelastic,since the price elasticity of supply is equal to 1.1.
C) elastic,since the price elasticity of supply is equal to 0.91.
D) elastic,since the price elasticity of supply is equal to 1.1.

Question

Quizplus · Accepted Answer

The price elasticity of supply is calculated using the midpoint method as (percentage change in quantity supplied) / (percentage change in price). Here, the percentage change in price is (0.60 - 0.50) / ((0.60 + 0.50) / 2) = 0.18, and the percentage change in quantity supplied is 0.20. Thus, the elasticity is 0.20 / 0.18 = 1.1, which is greater than 1, indicating that supply is elastic.

Holding All Other Factors Constant and Using the Midpoint Method,if