Question

If the price of a good increases by 10 percent, its quantity demanded drops by 50 percent. The price elasticity of demand is: Multiple Choice

Answer 1

Option D.

The price elasticity of demand measures the changes in quantity demanded with respect to the changes in price of a good or a service.

It is given as, P.E.D = %$\Delta Qd$ ÷ %$\Delta P$.

Here, price increases by 10% which causes quantity demanded to fall by -50%.

If we substitute these values in the above equation we get,

P.E.D = -50% ÷ 10%

= -5.0%//

This shows that the good is elastic in demand as the quantity demanded falls when price increases.