The correct answer is: the supply is inelastic.
Price elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.
If the price elasticity of supply is less than 1, as in this case where it is 0.75, the supply is considered inelastic. This means that the percentage change in quantity supplied is less than the percentage change in price. In other words, suppliers are not very responsive to price changes.
Here’s a breakdown of the options:
- a) the supply is elastic – Incorrect. If the elasticity is less than 1, the supply is inelastic, not elastic.
- b) the supply is inelastic so the demand must also be inelastic – Incorrect. The elasticity of supply does not determine the elasticity of demand. They are separate concepts.
- c) an increase in the price boosts the quantity supplied by a larger percentage – Incorrect. If the supply is inelastic, an increase in price will result in a smaller percentage increase in quantity supplied.
- d) the percentage change in quantity supplied is less than the percentage change in price – Correct. This is the definition of inelastic supply.