Question

True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes less elastic because firms may need to invest in additional capital in order to increase production further.

Answer 1

Answer:

True

Explanation:

Price elasticity of supply refers to degree of responsiveness of quantity supplied to a change in price.

When a supplying firm is nearing it's maximum capacity, to produce an extra unit of quantity would now involve a much higher cost as highly advanced machinery and other capital expenditure would be required to further increase production from 'almost maximum capacity' towards 'maximum capacity'.

The supplier in this case will not be compensated much by an increase in price since increase in costs would be even more. Thus, beyond this level of near maximum, a supplier will not feel encouraged enough to increase supply in return for a higher price.

Hence degree of responsiveness to a change in price would be less i.e supply would be less elastic.