Multiple Choice / True-False
- The absolute value of price elasticity of demand |E|
a. is |%ΔP| ÷ | %ΔQd|
b. is less than one when marginal revenue is positive.
c. is always greater than one.
d. is always greater than one when marginal revenue is negative.
e. gets smaller as price falls along demand.
The Correct Answer and Explanation is :
The correct answer is d. is always greater than one when marginal revenue is negative.
Explanation:
Price elasticity of demand (PED) is a measure of how sensitive the quantity demanded of a good is to a change in its price. It is typically expressed as the absolute value of the percentage change in quantity demanded divided by the percentage change in price:
[
|E| = \left|\frac{\% \Delta Q_d}{\% \Delta P}\right|
]
Where:
- (\% \Delta Q_d) is the percentage change in quantity demanded.
- (\% \Delta P) is the percentage change in price.
Now, let’s break down the options:
a. |%ΔP| ÷ |%ΔQd|:
This is incorrect because the formula for price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price (not the reverse).
b. is less than one when marginal revenue is positive:
This is incorrect. When marginal revenue is positive, it indicates that the price elasticity of demand is elastic (greater than 1), not less than one. In other words, when marginal revenue is positive, the demand curve is in the elastic range where PED > 1.
c. is always greater than one:
This is incorrect. The price elasticity of demand can be less than one (inelastic demand) or greater than one (elastic demand) depending on the price range and the nature of the good. It is not always greater than one.
d. is always greater than one when marginal revenue is negative:
This is correct. When marginal revenue is negative, it indicates that the price elasticity of demand is in the inelastic range of the demand curve (PED < 1). The total revenue decreases as price increases, which happens when the demand is inelastic.
e. gets smaller as price falls along demand:
This is incorrect. As price falls, the absolute value of price elasticity of demand typically increases, especially for more elastic goods (where demand becomes more responsive to price changes as you move down the curve).
In conclusion: The correct choice is d because when marginal revenue is negative, it corresponds to the inelastic range of the demand curve, where the absolute value of price elasticity of demand is greater than one. This is consistent with the economic principle that total revenue decreases as price increases when demand is inelastic.
I’ll generate an image to help illustrate this.
Here is a graph illustrating the relationship between price elasticity of demand and marginal revenue. The graph highlights the elastic and inelastic regions of the demand curve, as well as where marginal revenue becomes negative and price elasticity is greater than one. Let me know if you’d like further details!
