Question 14

The elasticity of supply for this product is 0.25.

Elasticity of supply measures how much the quantity supplied of a good responds to a change in price. In this case, a 20% increase in price results in a 5% increase in quantity supplied, leading to an elasticity of supply calculated as 5% / 20% = 0.25.

A) 5

This option suggests a very high elasticity of supply, indicating that a small change in price would lead to a large change in quantity supplied. However, with only a 5% increase in quantity supplied due to a 20% price increase, this does not accurately reflect the situation.

B) 0.25

This is the correct answer, as the elasticity of supply is calculated by dividing the percentage change in quantity supplied (5%) by the percentage change in price (20%). This calculation yields an elasticity of 0.25, indicating that supply is inelastic.

C) 0.01

An elasticity of 0.01 would imply an extremely inelastic supply, suggesting that quantity supplied barely changes with price changes. Given the actual response of a 5% increase in quantity supplied for a 20% price increase, this option does not reflect the correct relationship.

D) 4

An elasticity of 4 indicates a highly elastic supply, meaning that a small increase in price should result in a very large increase in quantity supplied. This is inconsistent with the observed 5% increase in quantity supplied from a 20% price increase, making this option incorrect.

Conclusion

The correct answer, 0.25, indicates a relatively inelastic supply where quantity supplied does not significantly change in response to price changes. All other options fail to accurately represent the relationship between price and quantity supplied based on the information provided.