Suppose there is a 10 percent increase in the price of good X and it causes a 10 percent decrease in the quantity of X demanded. Price elasticity of demand for X is
A)0.
B)1.
C)10.
D)100.

Question

Suppose there is a 10 percent increase in the price of good X and it causes a 10 percent decrease in the quantity of X demanded. Price elasticity of demand for X is
A)​0.
B)​1.
C)​10.
D)​100.

Quizplus · Accepted Answer

Price elasticity of demand = percentage change in quantity demanded / percentage change in price.

Here, the percentage change in price is 10% and it causes a percentage change in quantity demanded of -10%.

Therefore, price elasticity of demand = (-10% / 10%) = -1.

Note that elasticity is always negative due to the inverse relationship between price and quantity demanded. However, we consider the absolute value of elasticity (i.e. ignore the negative sign) to determine the degree of responsiveness of quantity demanded to a change in price.

In this case, the absolute value of elasticity is 1 (i.e. |-1| = 1), which indicates unit elasticity. This means that the percentage change in quantity demanded is equal in magnitude to the percentage change in price.

Suppose There Is a 10 Percent Increase in the Price