Question

If the demand for a good changes by 60% due to 40% change in price, the elasticity of demand will be

• A. 0.5
• B. -1.5
• C. 1
• D. 0

Hint:

Elasticity = (% Change in Demand) / (% Change in Price). Remember to include the negative sign for price elasticity of demand.

Answer 1

The Correct Option is B

The formula for price elasticity of demand (PED) is: \[ PED = \frac{%\ \text{Change in Quantity Demanded}}{%\ \text{Change in Price}} \] Given:

% Change in Quantity Demanded = 60%
% Change in Price = 40%
Since price and quantity demanded have an inverse relationship (assuming a normal good), if one increases, the other decreases. We'll assign a negative sign to reflect this. Let's assume the price change was +40%, then the demand change is -60% (or vice-versa). \[ PED = \frac{-60%}{40%} = -1.5 \] The value is -1.5, which indicates that the demand is elastic (|PED|>1).