Question

Suppose Joe's price elasticity of demand for tennis balls is _____. If the price of tennis balls has decreased by 14%, then it can be concluded that the quantity of tennis balls demanded by Joe has ______ by 7%, everything else held constant.

A.) 0.5, increased

B.) 0.5, decreased

C.) 2.0, increased

D.) 2.0, decreased

Answer 1

Solution: B.) 0.5, decreased

Price elasticity of demand, ep = % change in quantity demanded/% change in price

% change in price = -14. Since price elasticity of demand is positive, it means % change in quantity demanded must be negative so that ep may be positive.

ep = -7/-14 =0.5