Question

A price elasticity of demand for Good X equal to -.85 implies Group

a)if price increases by $1.00, quantity demanded will decrease by .85.

b)if price decreases by $0.85, quantity demanded will increase by 1.

c)a price of $1.00 will result in sales increase of .85 units.

d)if price increases by 1%, quantity demanded will decrease by .85%.

e)if price increases by 1%, demand will decrease by .85%.

Answer 1

Option d) and e)

elasticity of demand measures the percentage change in the quantity demanded of a good when there is a percentage change in the price. This implies that if the price of the good is changed by 1%, the quantity demanded will be changed by 1% times the elasticity of demand. Hence when price is changed by 1% in this case, quantity demanded will change by 0.85*1% = 0.85% and since the elasticity of demand is negative, but change will be in the opposite direction to the change in price.