April 2011 Q6, Q7

[e_sit]

Hi all,

For April 2011 Q6,
Is the rationale behind the solution that if the output increases (supply increases) and the firm is able to increases, this means there is also an increased in demand. However, since the price has not changed, the denominator of the price elasticity of demand is 0 and so the elasticity is infinity?


For April 2011 Q7,
Why would firm expecting future prices to rise NOT a reason for increasing supply? If I'm a supplier of a product and the market prices is raising and if I expect the prices to continuously go up (thus more profitable since cost is the same) I would supply more to the market, right?

Why would option B "Higher output will incur higher costs" be a reason for increasing supply? The rationale "because of higher costs, I need to produce more" would not make sense unless each product is making profit...which is not mentioned in option B.

Thanks

 

[divyam sankharva]

Q7- here they want which of the following is NOT a reason for rise in quantity supplied due to rise in price so option B is correct, you were considering the reasons for rise in quantity supplied
Q6- here the price will not remain the same as increase in supply sill shift the supply curve the right thus will decrease the price

 

[e_sit]

Thanks for the reply Divyam.

I understand your comments. So how would you explain the answers? What are your rationale?

Q7- here they want which of the following is NOT a reason for rise in quantity supplied due to rise in price so option B is correct, you were considering the reasons for rise in quantity supplied
Q6- here the price will not remain the same as increase in supply sill shift the supply curve the right thus will decrease the price