If the price elasticity of demand for a product is equal to 1.5, then a 10% decrease in price will:
The correct answer and explanation is:
The correct answer is: increase the quantity demanded by 15%.
Explanation:
Price elasticity of demand (PED) measures how sensitive the quantity demanded of a good is to changes in its price. It is calculated using the formula: PED=% change in quantity demanded% change in pricePED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}
In this case, the price elasticity of demand is given as 1.5, which means the demand for the product is elastic. When demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price.
Let’s break it down:
- Price elasticity of demand (PED) = 1.5 implies that for every 1% change in price, the quantity demanded will change by 1.5%.
- A 10% decrease in price means the price has fallen by 10%, so we need to calculate the percentage change in quantity demanded. Using the formula, we have:
% change in quantity demanded=PED×% change in price\% \text{ change in quantity demanded} = PED \times \% \text{ change in price} % change in quantity demanded=1.5×(−10%)\% \text{ change in quantity demanded} = 1.5 \times (-10\%)
This gives us a 15% increase in the quantity demanded because the negative sign for price change indicates a decrease in price, and the demand increases.
Therefore, when the price decreases by 10%, the quantity demanded will increase by 15%. This is typical for products with elastic demand because consumers are more responsive to price reductions. If the demand were inelastic (i.e., PED < 1), the quantity demanded would not increase as much. If the demand were unitary elastic (i.e., PED = 1), the quantity demanded would increase by exactly 10%, matching the price decrease.
Elastic demand suggests that the product is considered a luxury or has close substitutes.