Suppose the government of Nova Scotia wants to reduce the consumption of electricity by 5 percent.The price elasticity of demand for electricity is 0.40.You advise the Nova Scotia government to
A)raise the price of electricity by 12.5 percent.
B)raise the price of electricity by 2 percent.
C)lower the price of electricity by 12.5 percent.
D)raise the price of electricity by 8 percent.
E)lower the price of electricity by 2 percent.

Question

Quizplus · Accepted Answer

To achieve a 5 percent reduction in electricity consumption with a price elasticity of demand of 0.40, the price of electricity needs to be raised by the percentage change in quantity demanded divided by the elasticity. This calculation is 5% / 0.40 = 12.5%. Therefore, raising the price of electricity by 12.5 percent is the correct action.

Suppose the Government of Nova Scotia Wants to Reduce the Consumption