The All Smiles Greeting Card Company wants to increase the quantity of greeting cards it sells by 20%. If the price elasticity of demand is -5.0, the company must
A) increase price by 4.0%.
B) decrease price by 4.0%.
C) increase price by 0.25%.
D) decrease price by 0.25%.

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is % Change in Quantity Demanded / % Change in Price. Given an elasticity of -5.0 and a desired increase in quantity of 20%, we solve for the required % change in price: 20% / -5.0 = -4%. This means the company must decrease price by 4.0%.

The All Smiles Greeting Card Company Wants to Increase the Quantity