If the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent,the absolute value of the price elasticity of demand is
A)5.0.
B)0.4.
C)2.1.
D)5 percent.

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is (% change in quantity demanded)/(% change in price). 
In this case, the % change in price is 5% and the % change in quantity demanded is -2% (since the quantity demanded falls). 
Plugging these values into the formula gives us (-2%)/(5%) = -0.4. 
Since elasticity is always positive, we take the absolute value and get 0.4. Therefore, the correct answer is B.

If the Price of Cell Phones Increases by 5 Percent