A firm increases its price from $8 to $12 and sees demand for the product fall by 20%. What would the price elasticity of demand be for this product? A 0.4 B 1 C 2.5 D 1.5
Question
A firm increases its price from 12 and sees demand for the product fall by 20%. What would the price elasticity of demand be for this product? A 0.4 B 1 C 2.5 D 1.5
Solution
The price elasticity of demand is calculated using the formula:
% Change in Quantity Demanded / % Change in Price
First, we need to calculate the percentage change in price and quantity demanded.
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The change in price is from 12, which is a 4/$8)*100 = 50%.
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The percentage change in quantity demanded is given as a 20% decrease.
Now we can calculate the price elasticity of demand:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price = -20% / 50% = -0.4
The negative sign indicates that the price and quantity demanded are inversely related, which is the law of demand. However, when discussing price elasticity, we often ignore the negative sign and focus on the absolute value. So, the price elasticity of demand would be 0.4.
Therefore, the correct answer is A) 0.4.
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