If a one percent decrease in the price of a pound of pound cake causes a three percent decrease in the quantity of pound cake supplied:

• A. Demand is inelastic
• B. Demand is elastic
• C. Supply is inelastic
• D. Supply is elastic

Answer: (D)

Verified step by step guidance

1. Understand the concept of elasticity: Elasticity measures how much the quantity supplied or demanded responds to changes in price. In this case, we are dealing with price elasticity of supply.
2. Identify the given information: A 1% decrease in price leads to a 3% decrease in the quantity supplied. This indicates how sensitive the supply is to price changes.
3. Calculate the price elasticity of supply using the formula: \( E_s = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}} \). Substitute the given values into the formula.
4. Interpret the elasticity value: If the absolute value of the elasticity is greater than 1, supply is considered elastic. This means the quantity supplied is highly responsive to price changes.
5. Conclude based on the elasticity value: Since the calculated elasticity is greater than 1, the supply of pound cake is elastic, meaning suppliers significantly reduce the quantity supplied when the price decreases.