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Microeconomics - Tutorial Practice Attempt 6

The document contains a tutorial with questions about price elasticity of supply. It defines price elasticity of supply and describes the different types: inelastic supply where percentage change in quantity is less than percentage change in price; elastic supply where percentage change in quantity is greater; unit elastic where changes are equal; perfectly elastic where any price increase leads to infinite quantity change; and perfectly inelastic where price changes don't affect quantity. It then asks readers to identify the elasticity in scenarios and provides the answers.

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Kelyn Kok
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127 views2 pages

Microeconomics - Tutorial Practice Attempt 6

The document contains a tutorial with questions about price elasticity of supply. It defines price elasticity of supply and describes the different types: inelastic supply where percentage change in quantity is less than percentage change in price; elastic supply where percentage change in quantity is greater; unit elastic where changes are equal; perfectly elastic where any price increase leads to infinite quantity change; and perfectly inelastic where price changes don't affect quantity. It then asks readers to identify the elasticity in scenarios and provides the answers.

Uploaded by

Kelyn Kok
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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TUTORIAL EXERCISES

Question 1
Define price elasticity of supply.

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage
change in the quantity supplied of a product by the percentage change in the product’s price

Question 2
Explain and illustrate the different types/degrees of price elasticity of supply.

Inelastic supply – holding the values of other variables constant, the price elasticity of supply is less than
1 in absolute value, where the percentage changed in quantity supplied is less than the percentage
change in price

Elastic supply – holding the values of other variables constant, the price elasticity of supply is greater
than 1 in absolute value, where the percentage changed in quantity supplied is greater than the
percentage change in price
Unit elastic - holding the values of other variables constant, the price elasticity of supply is equal to 1,
where the percentage increase in price causes the same percentage increase in quantity supplied

Perfectly elastic - holding the values of other variables constant, the price elasticity of supply is equal to
infinity, where any increase in price causes the percentage change in quantity supplied to become
infinite

Perfectly inelastic - holding the values of other variables constant, the price elasticity of supply is equal
to 0, where the increase or decrease in price causes no change in quantity supplied

Question 3
In each of the following cases, do you think the price elasticity of supply is:
(i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not
perfectly inelastic? Explain using a diagram.

a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a
cabin on the Queen Mary 2.

perfectly inelastic (quantity will not change)

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

perfectly elastic

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 about 20% during this month.

inelastic, but not perfectly inelastic

d. Owners of vacation homes in Maine rent them out during the 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 homes themselves during the summer.

elastic, but not perfectly elastic

Question 4
In November 1998, Vincent van Gogh’s self-portrait sold at an auction for $71.5 million. Portray this sale
in a demand and supply diagram and comment on the elasticity of supply. Comedian George Carlin once
mused, “If a painting can be forged well enough to fool some experts, why is the original so valuable?”
Illustrate to answer the question.

There is only one painting, hence the supply is perfectly inelastic. Therefore, buyers have to accept the
prevailing price or be out of the market. Demand would not increase or decrease the supply only the
price.
** The demand curve would meet the supply curve (line) at the last sold price. The demand curve
should still have a downward slope, if there happened to be two paintings (impossible in reality) the
price of the one would go down.

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