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The supply function for a good is $q = -50 + 5p$. Using the point method, the elasticity of supply when price is Rs 20 equals:
A5.0
B0.5
C2.0
D1.0
Answer & Solution
Correct answer: C. 2.0
1. Point elasticity: $E_s = \dfrac{dq}{dp} \times \dfrac{p}{q}$.
2. Differentiate the supply function: $\dfrac{dq}{dp} = 5$.
3. At $p = 20$: $q = -50 + 5(20) = -50 + 100 = 50$.
4. $E_s = 5 \times \dfrac{20}{50} = 5 \times 0.4 = 2.0$. Forgetting the $p/q$ factor wrongly gives 5.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit III "Supply", p.9_
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