Question

If the price elasticity of supply is 1.5, and a price increase led to a 3% increase in quantity supplied, then the price increase is about

Select one:

a. 0.2%.

b. 0.5%.

c. 2.0%.

d. 4.5%.

Answer 1

Given

Price elasticity of supply=1.5

Percent change in quantity supplied=+3%

We know that

Price elasticity of supply=Percent change in quantity supplied/Percent change in price

So,

1.5=(+3%)/Percent change in price

On rearranging we get

Percent change in price=(+3%)/1.5=+2%

i.e. Price should increase by 2%

Correct option is

c) 2.0%