If the price elasticity of demand is .5 and the price elasticity of supply is 1,then a 9% increase in the demand for the product can be expected to increase the price by 6%.

Question

Quizplus · Accepted Answer

Using the formula %ΔP = %ΔQd * (1/εd - 1/εs), we can calculate the expected price increase as follows:

%ΔP = 9% * (1/0.5 - 1/1)
%ΔP = 9% * (2 - 1)
%ΔP = 9% * 1
%ΔP = 9%

Therefore, the price is expected to increase by 9%.

Alternatively, we can use the following formula to calculate the new quantity demanded:

%ΔQd = εd / (εs + εd) * %ΔP

%ΔQd = 0.5 / (1 + 0.5) * 9%
%ΔQd = 0.5 / 1.5 * 9%
%ΔQd = 0.333 * 9%
%ΔQd = 3%

This means that the quantity demanded is expected to increase by 3%.

To find the expected price increase, we can use the formula:

%ΔP = %ΔQd / εd * εs

%ΔP = 3% / 0.5 * 1
%ΔP = 6%

Therefore, the statement is true and the answer is A. A 9% increase in demand is expected to increase the price by 6%.

If the Price Elasticity of Demand Is