Question

A previous study has estimated the price of elasticity of demand for residential water use in California to be -0.4. What is the % increase in the price of residential water necessary to reduce residential water use in California from an average of 100 gallons per day per person to 80 gallons per day per person?

Answer 1

Answer: 50% is the increase in the price of residential water

Given: Price elasticity of demand = (-) 0.4

Q1 = 100

Q2 = 80

To find: % change in price

Calculation:

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

% change in quantity demanded = =

% change in quantity demanded = = (-) 20%

% change in quantity demanded = (-) 20%

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

(-) 0.4 = (-)20% / % change in price

% change in price = (-)20% / (-) 0.4

% change in price = 50%