Question

if the price elasticity of demand ed is equal to 2 then a 20% increase in...

if the price elasticity of demand ed is equal to 2 then a 20% increase in quantity demanded would result in a
A. None of the above
B. 10% decrease in price
C. 10% increase in price
D. 40% increase in price
E. 20% decrease in price
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Answer #1

Price elasticity of Demand

Price elasticity of demand is calculated as percentage change in quantity demanded divided by percentage change in price.

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Note - Due to inverse relationship between price and quantity demanded elasticity will always come as negative and that's why the negative sign is ignored in elasticity of demand.

Now coming to the question

Price elasticity of Demand = 2

Increase in Quantity Demanded = 20%

Now if the quantity demanded is increased by 20% that means the price will decrease by some percentage

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

2 = 20 / % Change in Price

% Change in Price = 10%

Hence the price will decrease by 10%

Option B is correct

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