Question : Consider being informed that the supply's own-price elasticity is 0.5. Which of the following statements accurately explains this number?
Option 1: A 1% increase in price will result in a 50% increase in quantity supplied.
Option 2: A 1% increase in price will result in a 5% increase in quantity supplied.
Option 3: A 1% increase in price will result in a 2% increase in quantity supplied.
Option 4: A 1% increase in price will result in a 0.5% increase in quantity supplied.
Correct Answer: A 1% increase in price will result in a 0.5% increase in quantity supplied.
Solution :
The elasticity of demand (Ed) = △Percentage change in quantity demanded / △Percentage Change in Price
The elasticity of demand (Ed) = 0.5% / 1%=0.5
Hence option d is the correct answer.
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