Assume that demand for a service depends upon price and income,where price elasticity of demand [EP] = -0.6 and income elasticity [EY] = 1.2.If price falls by 4% and income rises by 2%,the quantity demanded of the service will _____.
A)not be affected as the change in price will cancel the change in income
B)increase by 6%
C)increase by 4.8%
D)decrease by 9.6%
E)decrease by 2.4%

Question

Quizplus · Accepted Answer

Using the price elasticity of demand formula, we can calculate the percentage change in quantity demanded as:

% change in quantity demanded = EP x % change in price
% change in quantity demanded = -0.6 x (-4%) = 2.4%

Using the income elasticity formula, we can calculate the percentage change in quantity demanded as:

% change in quantity demanded = EY x % change in income
% change in quantity demanded = 1.2 x 2% = 2.4%

To find the total percentage change in quantity demanded, we add the percentage changes due to price and income:

Total % change in quantity demanded = 2.4% + 2.4% = 4.8%

Therefore, the quantity demanded of the service will increase by 4.8%, which is option C.

Assume That Demand for a Service Depends Upon Price and Income,where