When the price of a good increased by 5 percent, the quantity demanded of it decreased 10 percent. The price elasticity of demand is ________. A price rise will ________ total revenue.
A)2.0; decrease
B)0.5; decrease
C)2.0; increase
D)0.5; increase
E)-2.0; decrease

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, the quantity demanded decreased by 10% when the price increased by 5%, so the price elasticity of demand is -10% / 5% = -2.0. A price elasticity of demand of -2.0 indicates that the demand for the good is elastic, meaning that a small change in price will lead to a relatively large change in quantity demanded.A price rise will decrease total revenue if the demand for the good is elastic. This is because the decrease in quantity demanded will outweigh the increase in price, leading to a net decrease in total revenue.

When the Price of a Good Increased by 5 Percent