Suppose that the price elasticity of supply is 1.25 and the quantity supplied increases by 10%. Other things being equal, the percentage change in the price should be
A) a 0.8% increase in the price.
B) an 8% increase in the price.
C) a 1.25% increase in the price.
D) a 12.5% increase in the price.

Question

Quizplus · Accepted Answer

The formula for price elasticity of supply is:

% change in quantity supplied / % change in price

We are given that the price elasticity of supply is 1.25, and the quantity supplied increases by 10%.

To find the percentage change in price that would result from this, we can use the formula:

% change in price = (% change in quantity supplied) / (price elasticity of supply)

% change in price = (10%) / (1.25)

% change in price = 8%

Therefore, the percentage change in price should be an 8% increase.

Suppose That the Price Elasticity of Supply Is 1