Elastic and inelastic supply

The following graph shows the supply of a good

For each of the regions, use the midpoint method to identify whether the supply of this good is elastic or inelastic.

Elastic Inelastic Region

Between Y and Z

Between W and X

True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes more elastic because firms may need to invest in additional capital in order to further increase production.

Solutions

Expert Solution

Answer : Using Mid point formula :

Mid point formula :

E _s = ( Q ₂ - Q ₁)/ ( Q ₂ + Q ₁) /2 / ( P ₂ - P ₁) / ( P ₁ + P ₂) /2

Between point Y and Z :

E _{s =} ( 72-64)/(72+64)/2/(180-90)/(180+90)/2

E_S = 0.1766

Supply is inelastic with the price.

Between point W and X:

E _s = ( 20-8)/(20+8)/2/(20-15)/(20+15)/2= 3

Supply is elastic with the price.

The Statement is true as it shows that at higher level of output Supply remain inelastic with the change in the price level.As there is a requirement of huge capital for increasing the production.

Rahul Sunny answered 2 years ago

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