Suppose the value of the price elasticity of demand is −3.This means that________.
A) a 1 per cent increase in the price of the good causes quantity demanded to increase by 3 per cent.
B) a 1 per cent increase in the price of the good causes quantity demanded to decrease by 3 per cent.
C) a 3 per cent increase in the price of the good causes quantity demanded to decrease by 1 per cent.
D) a $1 increase in price causes quantity demanded to fall by 3 units.

Question

Quizplus · Accepted Answer

A negative price elasticity of demand (-3 in this case) implies that an increase in price leads to a decrease in quantity demanded. The magnitude of this decrease is given by the absolute value of the elasticity, which is 3, meaning that a 1% increase in price will cause a 3% decrease in quantity demanded. Therefore, option B ("a 1 per cent increase in the price of the good causes quantity demanded to decrease by 3 per cent") is the correct answer. Option A is incorrect since it suggests an increase in demand when price increases, while the opposite is true in this case. Option C is also incorrect since it suggests that a 3% price increase causes a 1% decrease in demand, which is the reverse of the actual relationship described by the elasticity. Option D is irrelevant as it does not pertain to the concept of elasticity.

Suppose the Value of the Price Elasticity of Demand Is