Question

4. Problems and Applications Q4

A price change causes the quantity demanded of a good to increase by 12%, while the total revenue of that good decreases by 16%.

True or False: The demand curve is elastic in this region.

True

False

Answer 1

Answer - False

Reason - When the percentage of change in demand is the same as the percentage of change in price, then the demand is unit elastic. Here price elasticity of demand is equal to 1

Where as, when the percentage of change in demand is less than the percentage of change in price, then the demand is inelastic. Here price elasticity of demand is more than 0 and less than 1.

Here the increase in demand is 12% and decrease in revenue or decrease in price is 16%. Let us see the elasticity of this situation -

Price elasticity of demand = % change in quantity ÷ % change in price

= 12% ÷ 16%

= 0.75.

As the elasticity of demand is less than one and more than zero. The demand curve is inelastic in this region.

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