Suppose that the percentage change in supply is 20%, the price elasticity of demand is 3, and the percentage change in the equilibrium price is 4%. What is the price elasticity of supply?
A) 0
B) 2
C) 4
D) 5

Question

Quizplus · Accepted Answer

The formula for calculating the price elasticity of supply is:
Price Elasticity of Supply = (% change in quantity supplied) / (% change in price)

We are given that the percentage change in supply is 20%, and the percentage change in the equilibrium price is 4%. We can use this information to calculate the percentage change in quantity supplied:

% change in quantity supplied = (% change in supply) + (price elasticity of demand) x (% change in price)
% change in quantity supplied = 20% + 3 x 4% = 32%

Therefore, the price elasticity of supply is:

Price Elasticity of Supply = (% change in quantity supplied) / (% change in price)
Price Elasticity of Supply = 32% / 4% = 8

Since the answer choices are not in decimal form, we need to divide our calculated elasticity by 4 to match the answer choices. This gives us:

Price Elasticity of Supply = 8 / 4 = 2

Therefore, the answer is B.

Suppose That the Percentage Change in Supply Is 20%, the Price