Question

Consider gas which has a PES of 1.6. What does this number mean?

a.Gas supply is inelastic

b. A 1% increase in the price of gas causes a huge 16% increase in the quantity supplied of oil

c. An increase in the price of gas causes the supply for gas to shift right

d.Gas supply is not at all responsive to changes in the price

e. None of the above

Answer 1

Answer

Formula :

the correct answer is (e) None of the above.

PES = Price elasticity of supply = % change in quantity supplied / % change in Price.

Here PES = 1.6

Price elasticity of Supply is inelastic when PES < 1 and PES is elastic when PES > 1. Here PES >1. Hence Gas supply is elastic. Hence option (a) is incorrect.

Thus 1.6 = % change in quantity supplied / % change in Price

=> % change in quantity supplied = % change in Price*1.6

If % change in price = 1% then % change in quantity supplied = 1*1.6 = 1.6%

Hence, A 1% increase in the price of gas causes a huge 1.6%(and not 16%) increase in the quantity supplied of oil. Hence option (b) is incorrect.

Shift in supply curve occurs when supply is affected by factors other than its own price and change in its own price will result in movement along supply curve(and not shift in supply curve). Hence option (c) is also incorrect.

Gas supply is not responsive to price change if Supply is highly or perfectly inelastic(i.e. PES = 0) but as discussed above that here supply is elastic(and not perfectly inelastic). Thus, option (d) is also correct.

So, All of the statements are incorrect.

Hence, the correct answer is (e) None of the above.