Question : If the price elasticity of demand for a good is -0.5, then a 10% increase in price will result in a:
Option 1: 0.5% decrease in quantity demanded.
Option 2: 5% decrease in quantity demanded.
Option 3: 0.5% increase in quantity demanded.
Option 4: 5% increase in quantity demanded.
Correct Answer: 5% decrease in quantity demanded.
Solution : The correct answer is (b) 5% decrease in quantity demanded.
The negative sign in front of the elasticity value indicates that the demand is inelastic. In this case, a 10% increase in price will lead to a proportionately smaller decrease in quantity demanded, which is 5% based on the given elasticity value of -0.5.
When demand is inelastic, changes in price have a relatively smaller impact on quantity demanded. Therefore, a 10% increase in price will result in a smaller 5% decrease in quantity demanded.
