Question

If the price of cocoa rises by 20%, the quantity supplied of cocoa rises by 4%.

What is the elasticity of supply?

Please explain in details neatly how to solve this problem

Thank you.

Answer 1

Ans. Price elasticity if supply is defined as the percentage change in quantity supplied of the good due to 1% change in price of the good.

=> Price elasticity of supply of cocoa = %Change in quantity supplied of cocoa / %Change in price of cocoa

=> Price elasticity of supply of cocoa = 4/20 = 0.2

This means that a 1% increase in price of cocoa increases the quantity supplied of cocoa by less than 1% i.e. 0.2%. This makes the supply of cocoa inelastic as price elasticity of supply is less than 1.

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