Question : Statement 1: When the price of a product increases by 10%, and its quantity demanded decreases by 5%, the price elasticity of demand is - 0.5.
Statement 2: The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage 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: When the price of a product increases by 10%, and its quantity demanded decreases by 5%, the price elasticity of demand is -0.5.
This statement is true. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, the price increased by 10% (a positive change) and the quantity demanded decreased by 5% (a negative change). Dividing -5% by 10% gives us -0.5, indicating an elastic response in quantity demanded to the change in price.
Statement 2: The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
This statement is also true. The price elasticity of demand is indeed calculated by dividing the percentage change in quantity demanded by the percentage change in price.
Therefore both statements are true.
