Suppose a factory is producing 100 units and the price of each unit is $10.If raising the price to $12 per unit results in a drop in sales of 12 units,what is the price elasticity of demand,η?
A)6
B)0.6
C)1.67
D)0.8
E)0.17

Question

Quizplus · Accepted Answer

The price elasticity of demand (η) is calculated using the formula η = (% change in quantity demanded) / (% change in price). Here, the quantity demanded decreases from 100 units to 88 units (a decrease of 12 units), which is a 12% decrease. The price increases from $10 to $12, which is a 20% increase. Therefore, η = -12% / 20% = -0.6. The negative sign indicates that the quantity demanded moves in the opposite direction of the price, which is a typical behavior for most goods, but the absolute value is often considered, making the answer 0.6.

Suppose a Factory Is Producing 100 Units and the Price