A good has a price elasticity of demand equal to 2. If new imports lower its price from $1.20 to $0.80, the percentage change in quantity demanded will be
A)an increase of 80 percent.
B)a decrease of 80 percent.
C)a decrease of 40 percent.
D)an increase of 2 percent.
E)an increase of 40 percent.

Question

Quizplus · Accepted Answer

The price elasticity of demand is 2, which means that for every 1% decrease in price, the quantity demanded increases by 2%. The price decreases from $1.20 to $0.80, which is a 33.33% decrease. Therefore, the quantity demanded will increase by 2 * 33.33% = 66.66%, which is closest to an increase of 80 percent.

A Good Has a Price Elasticity of Demand Equal to 2