Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5 per cent when it learns that the price of coffees at cafes in Melbourne has risen by 25 per cent. 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 the quantity supplied to a change in price. A PES of 0.2 means that a 1% increase in price will lead to a 0.2% increase in quantity supplied. In this scenario, the price of coffee has increased by 25%, so we can expect the Colombian producer to increase their quantity supplied by 5% (0.2 x 25%). Therefore, the statement is true.

Suppose a Coffee Plantation in Colombia Increases the Quantity of Coffee