Question : If the price elasticity of demand for a good is 1.2, then a 10% decrease in price will result in a:
Option 1: 1.2% increase in quantity demanded.
Option 2: 12% increase in quantity demanded.
Option 3: 1.2% decrease in quantity demanded.
Option 4: 12% decrease in quantity demanded.
Correct Answer: 12% increase in quantity demanded.
Solution : The correct answer is (b) 12% increase in quantity demanded.
A price elasticity of demand value of 1.2 indicates elastic demand. This means that a 1% change in price will result in a 1.2% change in quantity demanded. Therefore, a 10% decrease in price will lead to a proportionately larger increase in quantity demanded, which is 12% based on the elasticity value of 1.2.
When demand is elastic, changes in price have a relatively larger impact on quantity demanded. Hence, a 10% decrease in price will result in a 12% increase in quantity demanded.
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