A product has a PES of +2. If the price falls from £2.00 to £1.50, it supply will __________________

Question

BlackTom AI · Accepted Answer

First, restate the core data: the price elasticity of supply (PES) is +2, and the price falls from £2.00 to £1.50. The percentage change in price is calculated as (new price − old price) / old price = (1.50 − 2.00) / 2.00 = −0.50 / 2.00 = −0.25, i.e., a −25% change in price.

Next, apply the PES formula: PES = (%ΔQ_s) / (%ΔP). With PES = +2 and %ΔP = −25%, we solve for %ΔQ_s = PES × %ΔP = 2 × (−25%) = −50%. This means quantity supplied decreases by 50% when the price falls by 25%.

Now evaluate the answer options:

- Option a: 'decrease by 25%.' This would align with the price change but ignores the supply response magnitude given by PES; the correct quantity change is −50%, not −25%, so this is incorrect.

- Option b: 'decrease by 50%.' This matches the calculation above: a −25% price change times a PES of 2 yields a −50% change in quantity supplied. This option is consistent with the given elasticity.

- Option c: 'increase by 10%.' A price drop does not induce an increase in quantity supplied when PES is positive; a fall in price should reduce quantity supplied (and by a substantial amount given the elasticity), so this is wrong.

- Option d: 'increase by 50%.' Similar to c, this suggests a rise in quantity supplied opposite to what the elasticity and price change indicate; with a price fall, quantity supplied does not rise by 50%.

In summary, applying the elasticity relationship to the observed price change produces a 50% decrease in quantity supplied, which aligns with option b and contradicts the other choices.

Price Elasticity of Demand and Supply Quiz

A product has a PES of +2. If the price falls from £2.00 to £1.50, it supply will __________________

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