Multiple Choice
In microeconomics, the price elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price.
8
views
4. Elasticity
Price Elasticity of Supply
Multiple Choice
Which of the following best describes the influence of high prices on the behavior of producers with respect to price elasticity of supply?
A
Producers will decrease the quantity supplied when prices are high, regardless of elasticity.
B
Producers will only increase supply if demand is perfectly inelastic.
C
Producers are likely to increase the quantity supplied as prices rise, especially if supply is elastic.
D
High prices have no effect on the quantity supplied by producers.
Verified step by step guidance1
Step 1: Understand the concept of price elasticity of supply, which measures how much the quantity supplied of a good responds to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price, expressed as \(\text{Elasticity of Supply} = \frac{\% \Delta Q_s}{\% \Delta P}\).
Step 2: Recognize that when prices are high, producers have an incentive to increase the quantity supplied because higher prices typically mean higher potential revenue and profit.
Step 3: Consider the elasticity of supply: if supply is elastic (elasticity greater than 1), producers can increase quantity supplied significantly in response to price increases; if supply is inelastic (elasticity less than 1), the increase in quantity supplied will be smaller.
Step 4: Analyze the incorrect options: producers do not decrease quantity supplied when prices are high, and supply decisions are not dependent on demand being perfectly inelastic; also, high prices do affect quantity supplied.
Step 5: Conclude that the best description is that producers are likely to increase the quantity supplied as prices rise, especially when supply is elastic, because they can respond more flexibly to price changes.
Related Videos
Related Practice
