Question

The price elasticity of demand for a firm's product is equal to 2 over the range of prices being considered by the firm's manager. If the manager decreases the price of the product by 8 percent, the manager predicts the quantity demanded will __________ by _______________ percent. Group of answer choices

A. increase, 16%

B. decrease, 16%

C. increase, 4%

D. decrease, 4%

Answer 1

Option A.

• Price elasticity of demand refers to the change in the consumer's demand of any goods and services when it's prices changes.
• A good is said to have an elastic demand if it's price elasticity of demand is greater than 1 and it decreases with an increase in the price or Increases with a decrease in the price.
• We are given, the price elasticity of a firm's product which equals 2 and the fall in price as 8%.
• Then we can calculate the quantity demanded as :

PED = change in quantity demanded ÷ change in price

2 = $\Delta$ Q ÷ 8%

  $\Delta$Q = 2 * 8

= 16%//

Thus we can see that the quantity Increases by 16% when the price falls by 8%.