CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply
The price of a packaged snack rises from ₹20 to ₹25 per packet, and the quantity supplied by a Pune firm rises from 800 to 1,000 packets per day. Using the percentage method, the price elasticity of supply (initial values as base) is:
The elasticity of supply is 1.0. Quantity supplied rises by 25 percent (200 on 800) and price rises by 25 percent (₹5 on ₹20). Dividing the percentage change in quantity by the percentage change in price gives unitary elasticity.
- A0.8
- B1.0Correct
- C1.25
- D0.25
Explanation
Percentage change in quantity = 200/800 = 25%. Percentage change in price = 5/20 = 25%. Elasticity = 25/25 = 1, so supply is unitary elastic. The value 0.8 comes from inverting the ratio, and 1.25 comes from using the new price as the base for the quantity only.
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