If the price elasticity of demand for a product is 2.5, then a price cut from$2.00 to$1.80 will
A)increase the quantity demanded by about 2.5 percent.
B)decrease the quantity demanded by about 2.5 percent.
C)increase the quantity demanded by about 25 percent.
D)increase the quantity demanded by about 250 percent.

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is percentage change in quantity demanded divided by percentage change in price. A price elasticity of 2.5 means that for every 1% decrease in price, the quantity demanded increases by 2.5%. Here, the price decreases from $2.00 to $1.80, which is a 10% decrease ($0.20/$2.00). Therefore, the quantity demanded would increase by 2.5 times 10%, which equals 25%.

If the Price Elasticity of Demand for a Product Is