Question

The price elasticity of demand for an industry’s demand curve is equal to –0.3 for the range of prices over which supply increases. If total industry output is expected to increase by 12 percent as a result of the supply increase, managers in this industry should expect the market price of the good to _________(increase, decrease) by ______ percent.

Select one:

a. Increase by 8%

b. Decrease by 40%

c. Decrease by .8%

d. Increase by 36%

Answer 1

Answer

The correct answer is (b) Decrease by 40%

Price elasticity of demand = % change in Quantity demand / % change in Price

here It is given that, Price elasticity of demand = -0.3 and % change in quantity demand = % change in output demand = 12%

Using above formulas and information we get :

-0.3 = 12% / % change in Price

=> % change in Price = 12/-0.3 = -40% (where negative sign means that % change in price is negative i.e. Price decreases).

Thus, Price will decrease by 40%.

Hence, the correct answer is (b) Decrease by 40%.