Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5% when it learns that the price of a coffee at cafes in Melbourne has risen by 25%.The Colombian producer's price elasticity of supply of coffee beans is 0.2.

Question

Quizplus · Accepted Answer

The price elasticity of supply (PES) measures the responsiveness of quantity supplied to changes in price. In this case, the PES is given as 0.2. When the price of coffee in Melbourne increases by 25%, the Colombian producer increases its quantity supplied by 5%.

We can use the formula: PES = %Δquantity supplied / %Δprice

0.2 = 5% / 25%

0.2 = 0.2

Therefore, the statement is true, and the Colombian producer is relatively inelastic because its PES is less than 1.

Suppose a Coffee Plantation in Colombia Increases the Quantity of Coffee