Question

9.   You read that the own-price elasticity for college tuition is -2.5. If price rises by 5%, what is the predicted change in quantity demanded (assuming all other factors equal)?

a. fall of 5%

b. fall of 12.5%

c. increase of 5%

d. increase of 12.5%

Answer 1

You read that the own-price elasticity for college tuition is -2.5. If price rises by 5%, what is the predicted change in quantity demanded (assuming all other factors equal)?

a. fall of 5%

b. fall of 12.5%

c. increase of 5%

d. increase of 12.5%

Price is elasticity is the degree of responsiveness of the quantity demanded to a change in the price assuming all other things equal.

Price elasticity is calculated by the formula –

Elasticity = % change in the Quantity demanded ÷ % change in the Price

In the question

The price is rises by 5%

Price Elasticity (given) = 2.5

The relationship between price and quantity demanded is always inverse. Hence, when the price is rises quantity demanded must fall.

Putting the data given in the formula

2.5 = % change in the Quantity demanded ÷ 5%

% change in the Quantity demanded = 2.5 x 5% = 12.5%

Hence the answer will be   b. fall of 12.5%