If the price of a good increases by 10 percent and its quantity demanded drops by 50 percent, the price elasticity of demand is:
A) 1.0.
B) 0.2.
C) −5.0.
D) 2.0.

Question

Quizplus · Accepted Answer

Price elasticity of demand (PED) measures the responsiveness of the quantity demanded to changes in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
PED = (% change in quantity demanded) / (% change in price)

Using the information given in the question, we have:
% change in price = 10%
% change in quantity demanded = -50% (since the quantity demanded drops)

Substituting these values into the PED formula, we get:
PED = (-50%/10%) = -5.0

A negative value of PED indicates that the quantity demanded and price move in opposite directions, which is consistent with the law of demand. The magnitude (absolute value) of PED tells us how much the quantity demanded changes in response to a price change. In this case, a 10% price increase causes a 50% drop in quantity demanded, so the demand for this good is highly elastic (i.e., very responsive to price changes). A PED of -5.0 is greater than 1, which means that the percentage change in quantity demanded is greater than the percentage change in price, indicating elastic demand.

If the Price of a Good Increases by 10 Percent