Suppose the price elasticity of demand for bread is 0.2. If the price of bread falls by 10 percent, the quantity demanded will increase by
A)2 percent and total expenditures on bread will rise.
B)2 percent and total expenditures on bread will fall.
C)20 percent and total expenditures on bread will fall.
D)20 percent and total expenditures on bread will rise.

Question

Quizplus · Accepted Answer

The price elasticity of demand is 0.2, meaning a 10% decrease in price will lead to a 2% increase in quantity demanded (0.2 * 10%). Since demand is inelastic, total expenditures will fall as the percentage decrease in price is greater than the percentage increase in quantity demanded.

Suppose the Price Elasticity of Demand for Bread Is 0