If a 10 percent decrease in the price of a good leads to a 20 percent increase in the quantity demanded, then what is the price elasticity of demand? Group of answer choices a. 0.5 b. 20 c. 2 d. 10
Question
If a 10 percent decrease in the price of a good leads to a 20 percent increase in the quantity demanded, then what is the price elasticity of demand? Group of answer choices
a. 0.5
b. 20
c. 2
d. 10
Solution
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 percentage change in quantity demanded is 20 percent and the percentage change in price is -10 percent (it's a decrease, hence negative).
So, the price elasticity of demand = (20 / -10) = -2.
However, in elasticity, we usually take the absolute value, so the price elasticity of demand is 2.
Therefore, the correct answer is:
c. 2
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