The price of gasoline rose 20% last month, the quantity demanded of gasoline fell by 5%. What is the price elasticity of demand?
A) 20
B) 5
C) 0.25
D) 25

Question

Quizplus · Accepted Answer

Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)

Percentage change in quantity demanded = -5% (since the quantity demanded fell by 5%)
Percentage change in price = +20% (since the price rose by 20%)

Price elasticity of demand = (-5%) / (+20%) = -0.25

Since the answer is a negative number, we can ignore the negative sign and say that the price elasticity of demand is 0.25. Therefore, the best choice is C.

The Price of Gasoline Rose 20% Last Month, the Quantity