Question : If the price elasticity of demand for a good is 2.5, then a 10% decrease in price will result in a:
Option 1: 2.5% increase in quantity demanded.
Option 2: 25% increase in quantity demanded.
Option 3: 2.5% decrease in quantity demanded.
Option 4: 25% decrease in quantity demanded.
Correct Answer: 25% increase in quantity demanded.
Solution : The correct answer is (b) 25% increase in quantity demanded.
The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. In this case, a price elasticity of 2.5 indicates that a 1% change in price will result in a 2.5% change in quantity demanded, proportionally.
Given that there is a 10% decrease in price, we can expect a proportionally larger increase in quantity demanded. By applying the price elasticity of 2.5 to the 10% decrease in price, we can calculate the change in quantity demanded:
Change in Quantity Demanded = Price Elasticity of Demand * Percentage Change in Price
Change in Quantity Demanded = 2.5 * (-10%) = -25%
Therefore, a 10% decrease in price will result in a 25% increase in quantity demanded.
