A firms estimates its PES as +0.8. Its current output level is 20,000 units per month. Following a price increase of 10%, the total output should rise to ____________________.

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BlackTom AI · Accepted Answer

We start by noting the given data: price elasticity of supply (PES) is +0.8, the current output is 20,000 units, and the price increases by 10%.

Option a: 21,600 units. To verify, apply the PES formula: percentage change in quantity supplied = PES × percentage change in price = 0.8 × 10% = 8%. Increase 8% of 20,000 = 0.08 × 20,000 = 1,600. Add to the original 20,000 gives 21,600. This matches option a exactly.

Option b: 21,500 units. This would represent a 7.5% increase from 20,000 (since 0.075 × 20,000 = 1,500). A 7.5% rise corresponds to a PES of 0.75 when the price rises by 10%, which is inconsistent with the given PES of +0.8.

Option c: 22,600 units. This implies a 13% increase from 20,000 (0.13 × 20,000 = 2,600). A 13% quantity response would require a PES of 1.3 with a 10% price rise, well above the given +0.8, so this is incorrect.

Option d: 22,000 units. This corresponds to a 10% increase in quantity (0.10 × 20,000 = 2,000). That would indicate a PES of 1.0 for a 10% price rise, again not matching the provided +0.8.

In summary, using the PES definition yields an 8% increase in output for a 10% price rise, producing 21,600 units. The result aligns with option a, while the other choices reflect either smaller or larger elastic responses that would require different PES values. The key idea is that quantity responds proportionally to price change scaled by PES, and here 0.8 × 10% = 8%.

Price Elasticity of Demand and Supply Quiz

A firms estimates its PES as +0.8. Its current output level is 20,000 units per month. Following a price increase of 10%, the total output should rise to ____________________.

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