Question : The price elasticity of demand is calculated as the:
Option 1: Percentage change in quantity demanded divided by the percentage change in price.
Option 2: Percentage change in price divided by the percentage change in quantity demanded.
Option 3: Total change in quantity demanded divided by the total change in price.
Option 4: Total change in price divided by the total change in quantity demanded.
Correct Answer: Percentage change in quantity demanded divided by the percentage change in price.
Solution : The correct answer is (a) Percentage change in quantity demanded divided by the percentage change in price.
The formula for price elasticity of demand is:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
By dividing the percentage change in quantity demanded by the percentage change in price, we can determine the responsiveness of quantity demanded to changes in price. The resulting value represents the magnitude of the elasticity, indicating whether demand is elastic (greater than 1), inelastic (less than 1), or unitary elastic (equal to 1).
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