First Choice Cracker company needs to increase the price of crackers by 5%,based on a substantial increase in input costs such as flour.The price elasticity of demand for crackers is 0.4.The company can expect the consumption of cereal to
A) decrease by 1.5%.
B) increase by 1.5%.
C) decrease by 2.0%.
D) increase by 2.0%.

Question

Quizplus · Accepted Answer

The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. In this case, the company is increasing the price by 5%, so we can expect the quantity demanded to decrease. The formula for the percentage change in quantity demanded is (-0.4) times the percentage change in price (5%), which equals -2%. This means that we can expect the consumption of crackers to decrease by 2%. Therefore, the best choice is C.

First Choice Cracker Company Needs to Increase the Price of Crackers