Scenario 5-1
Suppose that the supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.
-Refer to Scenario 5-1. The price elasticity of supply for aged cheddar cheese could be
A) -1.
B) 0.
C) 0.5.
D) 1.5.

Question

Quizplus · Accepted Answer

Since the supply of aged cheddar cheese is inelastic, its price elasticity of supply will be less than 1, which is reflected in the option C (0.5). A price elasticity of -1 (option A) would mean that supply is perfectly elastic, which is not the case. A price elasticity of 0 (option B) would mean that supply is perfectly inelastic, which is also not the case. A price elasticity of 1.5 (option D) would mean that supply is elastic, which contradicts the fact that the supply of aged cheddar cheese is inelastic.

Scenario 5-1 Suppose That the Supply of Aged Cheddar Cheese Is Inelastic