Price Elasticity of Supply Measures Supply Responsiveness

Steps:

• Define price elasticity of supply (PES) as the percentage change in quantity supplied divided by percentage change in price.
• Calculate interpretation: PES = 0.4, which is less than 1 in absolute value, indicating inelastic supply.
• Assess implications: Inelastic supply means quantity supplied responds little to price changes, limiting the firm's ability to meet demand fluctuations.
• Determine concern: Yes, the firm should worry about inflexibility in production scaling.

Why D is correct:

• PES < 1 defines inelastic supply, meaning the firm cannot easily increase output when demand rises and prices increase, per the elasticity formula %ΔQs / %ΔP = 0.4.

Why the others are wrong:

• A: Revenue effects depend on price elasticity of demand, not supply.
• B: Few substitutes relate to demand elasticity, not supply.
• C: Supply elasticity does not indicate demand levels.

Final answer: D