CA Foundation · Business Economics · Theory of Demand and Supply
The price of tea in a Kolkata market rises from ₹100 to ₹120 per kg, and the quantity of tea supplied by a wholesaler rises from 400 kg to 500 kg. Using the percentage (simple) method, the price elasticity of supply is:
Price elasticity of supply is 1.25. Quantity supplied rises by 25 percent (100 on 400) while price rises by 20 percent (20 on 100), so dividing 25 by 20 gives 1.25, which shows supply is elastic.
- A0.8
- B1.25Correct
- C1.0
- D1.5
Explanation
Percentage change in quantity supplied = (100/400) × 100 = 25%. Percentage change in price = (20/100) × 100 = 20%. Elasticity = 25/20 = 1.25, so supply is elastic. The value 0.8 comes from inverting the ratio (20/25).
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