Assuming elasticity is reported in absolute value, a unit elastic good:
A. has a measured elasticity of greater than zero.
B. has a measured elasticity of greater than one.
C. has a measured elasticity of less than one.
D. has a measured elasticity of exactly one.
The correct answer and explanation is :
The correct answer is:
D. has a measured elasticity of exactly one.
Explanation:
Elasticity, in economics, refers to how responsive the quantity demanded (or supplied) of a good is to changes in price. It is typically expressed as the percentage change in quantity demanded divided by the percentage change in price.
Price Elasticity of Demand (PED), or simply elasticity, is calculated using the formula:
$$
\text{Elasticity} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}
$$
The absolute value of this elasticity is used to avoid negative values, as the relationship between price and quantity demanded is usually inverse (when price rises, quantity demanded typically falls).
- If the elasticity is greater than 1, the good is considered elastic, meaning the quantity demanded changes proportionally more than the change in price.
- If the elasticity is less than 1, the good is considered inelastic, meaning the quantity demanded changes proportionally less than the change in price.
- If the elasticity is exactly 1, the good is said to be unit elastic, meaning that the percentage change in quantity demanded is exactly equal to the percentage change in price.
Thus, when a good has a unit elastic demand, the total revenue (price multiplied by quantity) remains constant when the price changes because the percentage change in quantity demanded offsets the percentage change in price.
For example, if the price of a unit elastic good rises by 10%, the quantity demanded will decrease by exactly 10%. As a result, the total revenue from the good will not change.
In summary, the key characteristic of a unit elastic good is that its elasticity is exactly equal to one, which makes option D the correct answer.