Assume the demand for electricity,a necessity with few substitutes,is -0.2.If the electric company raised its rates by 10 percent,we would expect
A) a 10 percent decrease in quantity demanded.
B) a 2 percent increase in quantity demanded.
C) a 10 percent increase in quantity demanded.
D) a 2 percent decrease in quantity demanded.
E) a 5 percent decrease in quantity demanded.

Question

Quizplus · Accepted Answer

The elasticity coefficient of -0.2 indicates that demand is inelastic. A 10% increase in price would result in a proportionally smaller decrease in quantity demanded. Using the midpoint formula, we calculate the percent decrease in quantity demanded as follows: 
Percent change in quantity demanded = (New quantity demanded - Original quantity demanded) / [(New quantity demanded + Original quantity demanded) / 2] x 100%
Percent change in quantity demanded = (0 - 100) / [(0 + 100) / 2] x 100%
Percent change in quantity demanded = -20%
Therefore, a 10% increase in price would result in a 2% decrease in quantity demanded (-20% x 10% = -2%).

Assume the Demand for Electricity,a Necessity with Few Substitutes,is -0