Question : Statement 1: If the price elasticity of demand for a product is -1.5, a 10% increase in price will result in a 15% decrease in quantity demanded.
Statement 2: The absolute value of the price elasticity of demand represents the percentage change in quantity demanded for a 1% change in price.
Option 1: Both statements are true.
Option 2: Both statements are false.
Option 3: Statement 1 is true, and statement 2 is false.
Option 4: Statement 1 is false, and statement 2 is true.
Correct Answer: Both statements are true.
Solution : The correct answer is indeed (A) Both statements are true.
Statement 1: If the price elasticity of demand for a product is -1.5, a 10% increase in price will result in a 15% decrease in quantity demanded.
This statement is true. The price elasticity of demand is a measure of the responsiveness of quantity demanded to changes in price. A price elasticity of demand of -1.5 indicates that a 1% increase in price will lead to a 1.5% decrease in quantity demanded. Therefore, a 10% increase in price would result in a 15% decrease in quantity demanded (10% multiplied by 1.5).
Statement 2: The absolute value of the price elasticity of demand represents the percentage change in quantity demanded for a 1% change in price.
This statement is also true. The absolute value of the price elasticity of demand represents the percentage change in quantity demanded for a 1% change in price. It is a measure of the responsiveness of quantity demanded to price changes, regardless of whether the price is increasing or decreasing. Taking the absolute value of the price elasticity allows us to focus on the magnitude of the responsiveness without regard to the direction of the price change.
Therefore, both statements are true.
