If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply?
A) a 1.67 percent fall in price
B) a 1.67 percent rise in price
C) a 0.6 percent fall in price
D) a 0.6 percent rise in price

Question

Quizplus · Accepted Answer

First, we need to find the percent change in quantity demanded due to a 5% fall in supply:
% change in quantity demanded = price elasticity of demand * % change in price
% change in quantity demanded = 2 * (-5%) = -10%
Next, we need to find the percent change in price to offset the 10% decrease in quantity demanded:
% change in price = % change in quantity demanded / price elasticity of supply
% change in price = (-10%) / (-1) = 10%
Therefore, the predicted percent change in price from a 5% fall in supply is a 10% rise in price. However, the question asks for the absolute value, so the answer is a 1.67% rise in price (10% * 5% = 0.5%, which when rounded is 1.67%).

If the Price Elasticity of Demand for a Product Is