Elasticity of supply practice questions.

The price elasticity of supply of a good is 0.4. This value means that

• quantity supplied changes by a smaller percentage than price
• quantity supplied changes by a larger percentage than the price
• supply is perfectly inelastic
• a 1% rise in price raises quantity supplied by 4%

Answer: quantity supplied changes by a smaller percentage than price

A PES below 1 means supply is price inelastic: a 1% price rise raises quantity supplied by only 0.4%. PES of 0 would be perfectly inelastic, and 4% would require a PES of 4.

Which of the following would tend to increase a firm's price elasticity of supply?

• Operating at full production capacity
• Holding large stocks of finished goods
• Using highly specialized, immobile factors of production
• Requiring a very long production period

Answer: Holding large stocks of finished goods

Firms with large inventories can respond quickly to a price rise by selling from stock, making supply more elastic. Full capacity, immobile factors and long production periods all reduce responsiveness.

A supply curve drawn as a vertical straight line has a price elasticity of supply equal to

• one
• zero
• infinity
• a value between zero and one

Answer: zero

A vertical supply curve means quantity supplied is fixed regardless of price, so the percentage change in quantity is always zero and PES = 0 (perfectly inelastic supply).

Any upward-sloping straight-line supply curve that passes through the origin has

• PES = 0 at every point
• PES > 1 at every point
• PES = 1 at every point
• a PES that falls continuously as price rises

Answer: PES = 1 at every point

For any straight line through the origin, price and quantity always change in the same proportion, so PES = 1 everywhere along the curve, whatever its slope.

Why is the price elasticity of supply of many agricultural commodities low in the short run?

• Agricultural goods have few substitutes in consumption
• The demand for food is income inelastic
• Farmers can instantly switch their fields between different crops
• A long growing period that cannot be shortened

Answer: A long growing period that cannot be shortened

Once a crop is planted, output cannot be expanded until the next growing season, so quantity supplied barely responds to price in the short run. This low PES contributes to the price volatility of primary commodities.

A straight-line supply curve that intersects the price axis (positive price intercept) has

• PES > 1 at every point
• PES < 1 at every point
• PES = 1 at every point
• PES = 0 at every point

Answer: PES > 1 at every point

A linear supply curve cutting the price axis is price elastic (PES > 1) at every point, whereas one cutting the quantity axis is inelastic at every point; only a line through the origin gives PES = 1.