Suppose the price of a good is $10 and quantity demanded is 50 units. When price increases to $12, quantity demanded decreases to 40 units. What does this indicate?
A) The quantity effect is larger than the price effect, indicating that demand is inelastic.
B) The quantity effect is larger than the price effect, indicating that demand is elastic.
C) The price effect is larger than the quantity effect, indicating that demand is inelastic.
D) The price effect is larger than the quantity effect, indicating that demand is elastic.

Question

Quizplus · Accepted Answer

The change in price caused a decrease in quantity demanded, indicating a negative relationship between price and quantity demanded. However, the percentage decrease in quantity demanded (10/50 = 0.2 or 20%) was greater than the percentage increase in price (2/10 = 0.1667 or 16.67%), indicating that demand is sensitive to changes in price, making it elastic. Therefore, the correct choice is (B) where the quantity effect is larger than the price effect, indicating that demand is elastic.

Suppose the Price of a Good Is $10 and Quantity