Question

If the price elasticity of demand is -2, a 1 percent decrease in price will

A. double the quantity demanded. B. increase the revenue. C. decrease the revenue. D. increase the demand by 2%. E. Both B and D are correct.

Answer #1

E. Both B and D are correct.

Explanation :

Price elasticity of demand =percentage change in quantity demanded /percentage change in price

-2= percentage change in quantity demanded /-1

-2*-1=percentage change in quantity demanded

2=percentage change in quantity demanded.

So quantity demanded will increase by 2%.

When price elasticity of demand is greater than 1 it is elastic. So here demand is elastic. When demand is elastic, price and total revenue moves into opposite direction. So when price will decrease, total revenue will increase.

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