Suppose the price elasticity of demand for wine is 1.60.A 12 per cent decrease in price will result in:
A)a 19.2 per cent increase in the quantity of wine demanded
B)a 19.2 per cent decrease in the quantity of wine demanded
C)a 7.5 per cent increase in the quantity of wine demanded
D)a 7.5 per cent decrease in the quantity of wine demanded

Question

Quizplus · Accepted Answer

Using the formula for the price elasticity of demand:
% change in quantity demanded / % change in price = 1.60
We know the % change in price is -12% (a decrease of 12%). Substituting into the formula we get:
% change in quantity demanded / -12 = 1.60
% change in quantity demanded = (-12) x 1.60
% change in quantity demanded = -19.2
Since the result is negative, we know that the quantity demanded decreases. Therefore, the correct answer is A, a 19.2% decrease in the quantity of wine demanded.

Suppose the Price Elasticity of Demand for Wine Is 1