Question

2. Suppose a firm has a value of 2.3 as an elasticity of output with the 200 units of output as a corresponding output. When firm expands their output towards 800 units, its elasticity of output becomes -1.2. Explain the economic meanings of these values considering the contents covered in the classes?

Answer 1

 Since the absolute value of elasticity tends to 1, this will mean that if we increase the price of goods by 1%, then demand will decrease by 1%. This is a rare case in which the inverse proportion always works in equal amounts.