If quantity demanded rises by 10 percent as price falls by 4 percent, the absolute value of price elasticity of demand equals Group of answer choices 0.40. 2.50. 0.04. 14.00.
The correct answer and explanation is:
To calculate the price elasticity of demand, we use the following formula: Price Elasticity of Demand (PED)=%Change in Quantity Demanded%Change in Price\text{Price Elasticity of Demand (PED)} = \frac{\% \text{Change in Quantity Demanded}}{\% \text{Change in Price}}
Given:
- % Change in Quantity Demanded = +10%
- % Change in Price = –4%
Step-by-step Calculation:
PED=10%−4%=−2.5\text{PED} = \frac{10\%}{-4\%} = -2.5
We are asked for the absolute value, so: ∣PED∣=2.5|\text{PED}| = 2.5
✅ Correct answer: 2.50
📘 Explanation (Approx. 300 words):
Price elasticity of demand (PED) measures how much the quantity demanded of a good responds to a change in its price. It is a key concept in economics that helps businesses and policymakers understand consumer behavior.
When calculating PED, the formula used is: PED=Percentage Change in Quantity DemandedPercentage Change in Price\text{PED} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}
The result tells us whether demand is elastic (responsive), inelastic (not very responsive), or unit elastic.
In this question, a 10% increase in quantity demanded occurs due to a 4% decrease in price. Plugging those values into the formula gives us: 10−4=−2.5\frac{10}{-4} = -2.5
The negative sign indicates the inverse relationship between price and quantity demanded, which is typical in demand curves. However, when discussing elasticity, we usually refer to the absolute value, so the answer becomes 2.5.
An elasticity value greater than 1 (like 2.5) means that demand is elastic — consumers are highly responsive to price changes. In this case, a small drop in price leads to a relatively large increase in demand, which might be true for luxury or non-essential items.
Understanding elasticity helps businesses make better pricing decisions. For example, if demand is elastic, lowering prices may increase total revenue, because the increase in quantity sold more than makes up for the lower price per unit.