The price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10 percent. What is the new quantity demanded?
a. 1,000
b. 4,000
c. 4,500
d. 6,000
Answer:B
Choice "b" is correct. The choice is derived from the following calculations:
Price elasticity of demand = % Change in quantity demanded / % Change in price
2.0 (Given) = 20% (Solve) /10% (Given)% Change in quantity demanded (20%) = X units (new) - 5,000 units (old) 15,000 units (old) = 4,000 units
We can assume the inverse relationship of price to quantity demanded, such that when price increases， quantity demanded decreases. As such, a 20 percent change in quantity demanded will be a decrease of 20 percent (from 5,000 units to 4,000 units).
Choice"a"is incorrect. The 1,000 units represent the unit change in quantity demanded to obtain a price elasticity of demand of 2.0, not the new units of quantity demanded.
Choice “c” is incorrect. Using the 4,500 units as the new quantity demanded results in a price elasticity of demand of 1.0.
Choice “d" is incorrect. Using the 6,000 units as the new quantity demanded incorrectly assumes that price and quantity demanded have a positive relationship.