Question

Suppose an economist stated that “food stamps serve only to drive food prices higher, not increase...

Suppose an economist stated that “food stamps serve only to drive food prices higher, not increase the quantity of food available to the poor.” For this statement to be true, identify what the elasticity of supply would have to be and explain why. In addition, predict what the elasticity of supply would have to be for a food stamp program to increase the availability of food to the poor with no price increase and explain why.

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Answer #1

According to the claim made by the economist the price elasticity of supply appears to be zero. This is because for any increase in the price there is no change in the quantity. Which indicates that there is no change in the percentage quantity supplied for a given percentage change in the price. Hanste of elasticity of supply should be zero in this case. Supply curve would be vertical.

Now in the second case, if there is no price increase for any given increase in the availability of food to the poor, the price elasticity of supply would have to be infinite. When this happens, the quantity of food available for the poor can be increased buy any percentage without any increase in the price. The supply curve would be horizontal.

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