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) a 0.2 percent decrease in price causes a 1 percent increase in quantity demanded.
C) a 5 percent decrease in price causes a 1 percent increase in quantity demanded.
D) a 0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded.

Question

Quizplus · Accepted Answer

The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. A value of 0.2 means that for a 5 percent decrease in price, quantity demanded will increase by 1 percent (0.2/1 = 0.2/0.05 = 4). Therefore, option C is correct. Option A is incorrect because it implies that a 20 percent decrease in price causes a 100 percent increase in quantity demanded, which is too extreme. Option B is incorrect because it implies that a 0.2 percent decrease in price causes a 100 percent increase in quantity demanded, which is also too extreme. Option D is incorrect because it implies that a 0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded, which is not consistent with the definition of price elasticity of demand.

If the Value of the Price Elasticity of Demand Is