Firms supplying twisty-ties decrease the quantity supplied of inputs by 10 percent when the price decreases by 5 percent.The price elasticity of supply for twisty-ties is
A) 4.0.
B) 0.4.
C) 2.0.
D) 0.2.
E) 1.0.

Question

Quizplus · Accepted Answer

Price elasticity of supply (PES) = (% change in quantity supplied)/(% change in price)
Given: 
When the price decreases by 5%, the quantity supplied decreases by 10%.

Therefore, 
% change in quantity supplied = -10%/ = -0.1
% change in price = 5%/ = 0.05

PES = (-0.1)/(0.05) = -2
The negative sign can be ignored because we are only concerned with the magnitude, so PES = 2.

Since the PES is greater than 1, the supply is elastic. A 1% change in price results in more than a 1% change in quantity supplied, and thus, the firm is highly responsive to changes in price.

Among the given choices, the closest value to 2.0 is C. Therefore, C is the correct answer.

Firms Supplying Twisty-Ties Decrease the Quantity Supplied of Inputs by 10