Question

Q24 - The supply curve will be more inelastic when

1. Inputs to production are scarce.

2. Firms' response to a price change is limited by the limited capacity of their production facilities.

3. A good has many substitutes.

4. The firm is experiencing diminishing returns to a variable input.

Q25 - A perfectly competitive market is one where

1. Each firm controls the price charged for its product by changing the quantity they produce .

2. Each firm sells at the government mandated price.

3. Each firm within the market must sell its good at the market price.

4. A firm can affect market price by increasing output.

Answer 1

Answer 24: (2) Firms' response to a price change is limited by the limited capacity of their production facilities.

Answer 25: (3) Each firm within the market must sell its good at the market price.

Explanation of answer 24: Inelastic supply means that with a one unit percentage change in prices, the corresponding percentage change in quantity supplied would be less than that. So if the production capability is limited, then for example even if the price rises, the company can't scale up its production for higher profits, because its production facility can only produce a limited number of units at a time. So the supply will be inelastic.

Explanation of answer 25: In perfect competition, there are huge number of sellers who sell the same homogeneous products. So for customers, there is wide amount of choice to choose from. Thus the price is only decided by the supply and demand equilibrium. And both the sellers and buyers have to accept this market determined price, and no one of them can influence it solely by themselves.

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