Question

12. Elastic and inelastic supply 

The following graph shows the supply of a good.

For each of the regions, use the midpoint method to identify whether the supply of this good is elastic or inelastic.

True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes more elastic because firms may need to invest in additional capital in order to increase production further.

Answer 1

Answer:

Between Y and Z:

Midpoint formula= [(Q2 – Q1)/(Q2+Q1)/2] / [(P2-P1)/(P2+P1)/2]

Q1=180 , Q2=360, P1=64, P2=72

Midpoint formula = [(360 – 180)/(360+180)/2]/[(72-64)/(72+64)/2]

= [(180 / 270)] / [(8/68)] = 5.66

Between W and X:

Midpoint formula= [(Q2 – Q1)/(Q2+Q1)/2] / [(P2-P1)/(P2+P1)/2]

Q1=8 , Q2=20, P1=30, P2=40

Midpoint formula = [(20 – 8)/(20+8)/2]/[(40-30)/(40+30)/2]

= [(16 / 14)] / [(10/35)] = 4

Region
Between Y and Z	Elastic
Between W and X	Elastic

Ans= False

At greater levels of quantity supplied where companies have reached almost maximum capacity, the supply becomes more inelastic as companies require additional capital to further augment production.