If the value of the price elasticity of demand is -0.2, this means that a
A)20 percent decrease in price causes a 1 percent increase in quantity demanded
B)0.2 percent decrease in price causes a 1 percent increase in quantity demanded
C)5 percent decrease in price causes a 1 percent increase in quantity demanded
D)0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded
E)100 percent decrease in price causes a 200 percent increase in quantity demanded

Question

Quizplus · Accepted Answer

The value of price elasticity of demand (-0.2) means that a 5 percent decrease in price causes a 1 percent increase in quantity demanded. This is calculated by dividing the percentage change in quantity demanded (1 percent) by the percentage change in price (-5 percent), which equals -0.2. Therefore, if the price is lowered by 5 percent, the quantity demanded will increase by 1 percent, indicating an inelastic demand.

If the Value of the Price Elasticity of Demand Is