Question

The elasticity of demand for marijuana is -0.5. If the price of marijuana increases by 10%, by how much does the quantity demanded decrease?

Answer 1

Price Elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a commodity in response to a change in it's price. Price Elasticity of demand refers to the ratio of the percentage change in quantity demanded of a commodity to a given price change in it's price.

e_{​​​​​​p}​​​​​ =(Percentage change in quantity demanded/Percentage change in price)

Here , we are given that :

the elasticity of demand for marijuana = -0.5

The percentage Increase in price = 10%

Thus , the percentage change in quantity demanded = ?

Let it be Q , then , according to the formula given above ,,

-0.5 = (Q/10)

Or , [(-0.5)×10] = Q

Or , -5 = Q

Or , Q = -5

Thus , the percentage decrease in quantity demanded is 5% . The minus sign denotes a 'decrease'