Assume that demand for a service depends upon price and income, where the price elasticity of demand is EP = -0.6 and income elasticity is EY = 1.2. If price falls by 4% and income rises by 2%, the quantity demanded of the service will _____.
A) not be affected as the change in price will cancel the change in income
B) increase by 6%
C) increase by 4.8%
D) decrease by 9.6%
E) decrease by 2.4%

Question

Quizplus · Accepted Answer

Using the price elasticity formula, the percentage change in quantity demanded can be calculated as:
EP = %ΔQ / %ΔP
-0.6 = %ΔQ / (-4%)
%ΔQ = (-0.6)(-4%) = 2.4%
Therefore, the quantity demanded will increase by 2.4% in response to a 4% decrease in price.
Using the income elasticity formula, the percentage change in quantity demanded can be calculated as:
EY = %ΔQ / %ΔY
1.2 = %ΔQ / (2%)
%ΔQ = 2.4%
Therefore, the quantity demanded will increase by an additional 2.4% in response to a 2% increase in income.
The total percentage change in quantity demanded is the sum of the two individual changes: 2.4% + 2.4% = 4.8%
Therefore, the quantity demanded will increase by 4.8% in total. The correct answer is C.

Assume That Demand for a Service Depends Upon Price and Income