Suppose that a 5% decrease in the price of a good results in a 7% increase in the quantity demanded. Over this range of prices, the demand for the good is defined asSelected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.aunit elastic.belastic.cperfectly inelastic.dinelastic.
Question
Suppose that a 5% decrease in the price of a good results in a 7% increase in the quantity demanded. Over this range of prices, the demand for the good is defined asSelected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.aunit elastic.belastic.cperfectly inelastic.dinelastic.
Solution
The elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, a 5% decrease in price leads to a 7% increase in quantity demanded.
So, the elasticity of demand = 7% / -5% = -1.4
The negative sign indicates the law of demand, which states that as price decreases, quantity demanded increases. However, for the purpose of elasticity, we usually take the absolute value, so we have 1.4.
If the elasticity is greater than 1, the demand is considered elastic. This means that the quantity demanded is sensitive to price changes.
So, the answer is b. elastic.
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