A 10 per cent increase in price leads to a 20 per cent decrease in the quantity demanded. The price elasticity of demand is equal to
A) 10.0.
B) 20.0.
C) 2.0.
D) 1.0.
E) 0.5.

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is % change in quantity demanded / % change in price. In this case, we know that a 10% increase in price leads to a 20% decrease in quantity demanded. We can use these percentages to calculate the price elasticity of demand as follows:

Price elasticity of demand = -20% / 10% = -2

The negative sign indicates that there is an inverse relationship between price and quantity demanded (i.e. as price increases, quantity demanded decreases). The absolute value of -2 is 2, so the price elasticity of demand is 2, which corresponds to choice (C).

A 10 Per Cent Increase in Price Leads to a 20