If the price of Good Y falls from $10 to $8, and the quantity demand of Good Y rises from 1,000 units to 1,200 units, the price elasticity of demand is:
A) 1.00.
B) 0.20.
C) 0.81.
D) 1.22.

Question

Quizplus · Accepted Answer

Price Elasticity of Demand (PED) is calculated using the formula: % change in quantity demanded / % change in price.

Using the values given in the question, we can calculate the % change in quantity demanded:
% change in quantity demanded = ((New quantity demanded - Old quantity demanded) / Old quantity demanded) x 100%
% change in quantity demanded = ((1,200 - 1,000) / 1,000) x 100%
% change in quantity demanded = 20%

Similarly, we can calculate the % change in price:
% change in price = ((New price - Old price) / Old price) x 100%
% change in price = ((8 - 10) / 10) x 100%
% change in price = -20%

Now we can substitute these values into the PED formula:
PED = % change in quantity demanded / % change in price
PED = 20% / -20%
PED = -1

The negative sign indicates that there is an inverse relationship between the price and quantity demanded of Good Y. However, we usually express PED in absolute value, so the answer is 1. However, since the question requires us to select from the given options, the closest option to 1 is 0.81, so the answer is C.

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