Graph 5-2

-If there is a 10 per cent increase in the price of a good and this leads to a four per cent decrease in the quantity demanded then the price elasticity is:
A) 2.5 and elastic
B) 2.5 and inelastic
C) 0.4 and elastic
D) 0.4 and inelastic

Question

Graph 5-2
 
-If there is a 10 per cent increase in the price of a good and this leads to a four per cent decrease in the quantity demanded then the price elasticity is:
A) 2.5 and elastic 
B) 2.5 and inelastic 
C) 0.4 and elastic 
D) 0.4 and inelastic

Quizplus · Accepted Answer

Price Elasticity of Demand = % change in quantity demanded / % change in price 
From the given information, 
% change in price = 10% 
% change in quantity demanded = -4% (negative sign shows the inverse relationship between price and quantity demanded)

Now, putting these values in the formula of price elasticity of demand:

Price Elasticity of Demand = (-4%/10%) = -0.4

As the value is negative, we ignore the sign and take the absolute value. So, the price elasticity of demand is 0.4. 
Since the absolute value of price elasticity of demand is less than 1, the demand is inelastic. Hence, the correct choice is D.

Graph 5-2 -If There Is a 10 Per Cent Increase in the Cent