The price elasticity of supply of butter is 0.2. The guaranteed price is originally set at £20 and the quantity produced is 1,000 tons. Which of the following quantities will represent the planned level of production for butter if the guaranteed price is reduced by 10%?

Question

Quizplus · Accepted Answer

The price elasticity of supply (PES) formula is % change in quantity supplied / % change in price. With a PES of 0.2 and a 10% decrease in price, the % change in quantity supplied is 0.2 * -10% = -2%. From 1,000 tons, a 2% decrease is 20 tons less, resulting in 980 tons.

The Price Elasticity of Supply of Butter Is 0