If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is:
A) 1.00.
B) 0.20.
C) 0.82.
D) 1.22.

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is:
% change in quantity demanded / % change in price

Here, the price has fallen by 20% (from $10 to $8), and the quantity demanded has risen by 20% (from 1,000 units to 1,200 units).

% change in quantity demanded = (New quantity - Old quantity) / Old quantity x 100%
% change in quantity demanded = (1,200 - 1,000) / 1,000 x 100%
% change in quantity demanded = 20%

% change in price = (New price - Old price) / Old price x 100%
% change in price = (8 - 10) / 10 x 100%
% change in price = -20%

Putting the values in the formula of price elasticity of demand:
Price elasticity of demand = 20% / -20%
Price elasticity of demand = -1.00

Since we are asked to express the absolute value, the answer is 1.00. However, it is also worth noting that the negative sign indicates that the demand for Good Y is elastic.

If the Price of Good Y Falls from $10 to $8