If a company increased its price from $100 to $120 and the quantity demanded fell by 40%, the price elasticity of demand for this product is
A) 2.
B) 1/2.
C) −1/2.
D) −2.
E) 4.

Question

Quizplus · Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the price increased by 20% (from $100 to $120, which is a $20 increase on $100), and the quantity demanded decreased by 40%. Therefore, the price elasticity of demand is -40% / 20% = -2, indicating that the demand is elastic and responds more than proportionately to changes in price.

If a Company Increased Its Price from $100 to $120