IAI Actuarial Core Principles · Business Economics · How competitive markets operate
When the price of a product rises from ₹80 to ₹88 per unit, a firm's quantity supplied rises from 500 to 540 units. Using the percentage change in each variable measured from the original values, what is the price elasticity of supply?
Price rises 10 percent (8 on 80) and quantity supplied rises 8 percent (40 on 500). Elasticity of supply is 8 divided by 10, which is 0.8, so supply is inelastic because quantity responds less than proportionately to price.
- A0.4
- B0.8Correct
- C1.25
- D8.0
- 0.64
Explanation
Price change is 8/80 = 10%. Quantity change is 40/500 = 8%. Elasticity is 8%/10% = 0.8, so supply is inelastic. Using 1.25 inverts the ratio, and 0.4 uses the wrong base for the quantity change.
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