If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent,then the elasticity of demand is
A) 0.
B) 1.
C) indeterminate.
D) 5.
E) 25.

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is %(change in quantity demanded)/%(change in price). Here, the price increases by 5% and the quantity demanded decreases by 5%, so the % change in quantity demanded and price is the same. Therefore, the elasticity of demand is 1, which means that the proportional change in quantity demanded is equal to the proportional change in price.

If the Price of a Product Increases by 5 Percent