Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is 0.25, by how much would you have to raise the price of water?
A) 10 percent
B) 25 percent
C) 40 percent
D) 100 percent

Question

Quizplus · Accepted Answer

We can use the formula for price elasticity of demand to solve this problem:

price elasticity of demand = percentage change in quantity demanded / percentage change in price

We know that the water company needs to get consumers to reduce their water consumption by 10 percent, which means that quantity demanded will decrease by 10 percent. We also know that the price elasticity of demand for water is 0.25.

Substituting these values into the formula, we get:

0.25 = -10% / percentage change in price

Solving for the percentage change in price, we get:

percentage change in price = -10% / 0.25

percentage change in price = -40%

This means that in order to get consumers to reduce their water consumption by 10 percent, the water company would have to raise the price of water by 40 percent.

Therefore, the correct answer is C) 40 percent.

Suppose You Are the Manager of a Local Water Company