Question : When the price of a good increases by 10%, and the quantity demanded decreases by 5%, what is the price elasticity of demand?
Option 1: 0.2
Option 2: 0.5
Option 3: 1.0
Option 4: 2.0
Answer (1)
19th Jan, 2024
Correct Answer: 0.5
Solution : The correct answer is (b) 0.5
The price elasticity of demand can be calculated using the formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
In this case, the price increases by 10% and the quantity demanded decreases by 5%. Plugging these values into the formula, we get
Price Elasticity of Demand = (-5%) / (10%) = -0.5
The negative sign indicates that the demand is price inelastic. However, the question asks for the absolute value.
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