Question

In each of the following cases, do you think the price elasticity of supply is (1) perfectly elastic; (2) perfectly inelastic; (3) elastic, but not perfectly elastic; or (4) inelastic, but not perfectly inelastic?

a. An increase in demand this summer for luxury cruise leads to a huge jump in the sales price of a cabin on the Queen of Oak Bay

b. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand.

c. Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall bout 20% during this month.

d. Owners of cottages on Quadra Island, BC rent them out during summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation home themselves during summer.

Answer 1

Price elasticity of supply = change in quantity supplied / % change in price

a.

Perfectly inelastic

Reason: The quantity supplied is fixed since it is a cruise ship. It means that change in quantity supplied is zero, implying zero elasticity of supply. Therefore,  an increase in demand this summer for luxury cruise leads to a huge jump in the sales price of a cabin on the Queen of Oak Bay

b.

Perfectly elastic

Reason: The price is fixed and thus the the elasticity is infinite ( as per the formula above ). It means that the supplyc can be changed as per the demand fluctuations to maintain a constant price.

c.

inelastic, but not perfectly inelastic

Reason: The supply is being cut by 10% when the price drop is 20%. Therefore, there is a less than unit change in supply for a unit change in demand, leading to a value of elasticity between 0 and 1.

d.

elastic, but not perfectly elastic

Reason: The supply is being cut by more than 50% when the price drop is 30%. Therefore, there is a more than unit change in supply for a unit change in demand, leading to a value of elasticity greater than 1.