If the price elasticity of demand is 0.5 and the price elasticity of supply is 1.0,then a 9% increase in the demand for the product can be expected to increase the price by 6%.

Question

Quizplus · Accepted Answer

If the price elasticity of demand is 0.5, it means that a 1% increase in price will lead to a 0.5% decrease in quantity demanded. Similarly, if the price elasticity of supply is 1.0, it means that a 1% increase in price will lead to a 1% increase in quantity supplied.

Now, if the demand for the product increases by 9%, the quantity demanded will increase by 4.5% (0.5 x 9). As a result, there will be an excess demand which will lead to an increase in price.

To find out how much price will increase, we can use the formula: percentage change in price = (percentage change in demand) / (elasticity of demand + elasticity of supply)

Using the given values, we can calculate:

percentage change in price = (4.5%) / (0.5 + 1.0) = 2.25%

Therefore, a 9% increase in demand for the product can be expected to increase the price by 2.25%. However, the statement in the question suggests a larger price increase of 6%. This may be possible depending on other factors such as the degree of competition in the market.

If the Price Elasticity of Demand Is 0