Question

In: Economics

The following graph displays four supply curves (HH, II, JJ, and KK) that intersect at point A.

The variety of supply curves

Using the graph, complete the table that follows by indicating whether each statement is true or false.

Statement True False

Between points A and B, curve II is perfectly inelastic.

Curve KK is more elastic between points A and C than curve JJ is between points A and D.

Between points A and D, curve JJ is inelastic.

Solutions

Expert Solution

Elasticity = %change in quantity/ % change in price = (dQ/dP) * (P/Q)

If the absolute value of elasticity is more than 1 then the demand is elastic and if it is less than 1 then it is inelastic demand.

1) For curve II the value of price changes by some percentage points between A and B but there is no change in quantity demanded. This means quantity is not at all responsive to the price and the price elasticity of demand is 0, which is perfectly inelastic demand. Hence the given statement is true.

2) At point A, P =200 and Q = 200

For curve KK, elasticity between A and C = (dQ/dP) * (P/Q) = (1/slope of KK) * (200/200)

= 1/slope of KK

For curve JJ, elasticity between A and D = (dQ/dP) * (P/Q) = (1/slope of JJ) * (200/200)

= 1/slope of JJ

Now remember that steeper lines have higher slopes. From the diagram it can be clearly seen that beyond A , KK is steeper than JJ. This means the slope of KK> slope of JJ

From this analysis it becomes clear that 1/slope of KK< 1/slope of JJ

This means that the elasticity for curve KK between A and C < elasticity for curve JJ elasticity between A and D

Hence the given statement is false as curve KK is less elastic between A and C than curve JJ is between A and D

c) At point A, P =200 and Q = 200

For curve JJ, elasticity between A and D = (dQ/dP) * (P/Q) = (1/slope of JJ) * (200/200)

= 1/slope of JJ

Now since JJ lies below the 45 degree line it means that its slope must be less than 1.

Elasticity = 1/slope of JJ

Since the slope is less than 1 the value of elasticity will necesssarily be more than 1. This means the curve JJ is elastic between A and D

Hence, the given statement is false.

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Rahul Sunny answered 1 year ago

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