CA Foundation · Business Economics · Theory of Demand and Supply
The supply function of a good is Qs = −20 + 5P. Using the point method, the price elasticity of supply at a price of ₹10 is:
The elasticity is about 1.67. At a price of ₹10, quantity supplied is 30 units, the slope is 5, so elasticity equals 5 multiplied by 10/30, which is 1.67, showing supply is elastic at that point.
- A0.6
- B1.67Correct
- C5.0
- D1.0
Explanation
At P = 10, Qs = −20 + 50 = 30. dQ/dP = 5. Elasticity = 5 x (10/30) = 1.67. The answer 0.6 results from inverting P/Q to Q/P and is wrong. The answer 5 is just the slope, ignoring the P/Q factor. The intercept is negative, so elasticity exceeds one.
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