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An industry has idle plant capacity. According to the source, the availability of spare production capacity makes the elasticity of supply:
Asmaller, since extra output always raises cost
Bexactly zero at every level of price change
Cgreater, since output can rise without higher cost
Dnegative, since spare capacity reverses the law
Answer & Solution
Correct answer: C. greater, since output can rise without higher cost
1. With spare capacity, firms can raise output without a rise in costs.
2. They can therefore respond strongly to a price rise.
3. A stronger quantity response means higher elasticity of supply.
4. So spare capacity makes supply more elastic; the greater the spare capacity, the greater the elasticity.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit III "Supply", p.10_
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