The price elasticity of demand for widgets is 0.80.Assuming no change in the demand curve for widgets,a 16 percent increase in sales implies a:
A) 1 percent reduction in price.
B) 12 percent reduction in price.
C) 40 percent reduction in price.
D) 20 percent reduction in price.

Question

Quizplus · Accepted Answer

Using the formula for price elasticity of demand, we have:

% change in quantity demanded = Price elasticity of demand x % change in price

We are given that the price elasticity of demand for widgets is 0.80 and the % change in quantity demanded is 16%. We can solve for the % change in price:

16% = 0.80 x % change in price
% change in price = 20%

So a 16% increase in sales implies a 20% reduction in price (option D).

The Price Elasticity of Demand for Widgets Is 0