If the government wants to reduce the consumption of water by 5%, and the price elasticity of demand for water is - 0.4, the government should:
A) raise the price of water by 0.08%
B) raise the price of water by 2%
C) lower the price of water by 0.4%
D) raise the price of water by 12.5%

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is: % change in quantity demanded = price elasticity of demand * % change in price. To achieve a 5% reduction in consumption with an elasticity of -0.4, the price must be increased by 12.5% (5% / 0.4).

If the Government Wants to Reduce the Consumption of Water