Question : If the price elasticity of demand for a good is 0.8, then a 10% increase in price will result in a:
Option 1: 0.8% increase in quantity demanded.
Option 2: 8% increase in quantity demanded.
Option 3: 0.8% decrease in quantity demanded.
Option 4: 8% decrease in quantity demanded.
Correct Answer: 0.8% decrease in quantity demanded.
Solution : The correct answer is (c) 0.8% decrease in quantity demanded.
A price elasticity of demand value of 0.8 indicates inelastic demand. This means that a 1% change in price will result in a proportionately smaller change in quantity demanded, specifically 0.8%. Therefore, a 10% increase in price will lead to a proportionately smaller decrease in quantity demanded, which is 0.8%.
When demand is inelastic, changes in price have a relatively smaller impact on quantity demanded. Hence, a 10% increase in price will result in a 0.8% decrease in quantity demanded.
