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Question
When the price increases by 50% and the supply increases only by 5% the price elasticity of supply of that commodity will be ______.
Options
E1 > 1
ES = 1
E1 < 1
E1 = 0
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Solution
When the price increases by 50% and the supply increases only by 5% the price elasticity of supply of that commodity will be E1 < 1.
Explanation:
Es = `("Percentage change in quantity supplied")/("Percentage change in price")`
Es = `(5%)/(50%)`
= 0.1
Since Es < 1, the supply is inelastic, meaning the percentage change in quantity supplied is less than the percentage change in price.
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