Question

QUESTION 18 Assume that a product's price elasticity of supply is 1.2 and the price of the product increases by 5 percent. What would be the impact of this decision on the quantity supplied? a. The quantity supplied will increase by 0.6 percent. b. The quantity supplied will decrease by 4.2 percent. c. The quantity supplied will increase by 4.2 percent. d. The quantity supplied will increase 6 percent.

Answer 1

percentage change in quantity supplied price elasticity of supply, E = percentage change in price of the product AQ(in%) AP(in%) 1.2 - 4Q(in%) 0.05 AQ=1.2* 0.05 = 0.06

As per the law of supply, quantity supplied of a good increases as price of the good increases and falls as price of the good falls.Therefore, price of the good and supply of the good are positively related.

Therefore, as price of the product increases by 5% the quantity supplied also increases by 6% given product's price elasticity of supply is 1.2

Correct answer is (D)