Question

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?a. 8%b. 5%c. 4%d. We can't tell how much quantity will decrease

Answer 1

Answer: Option (c) is correct.

Explanation:

Given that,

Price elasticity of demand = 0.5

Percentage increase in price = 8%

Price elasticity of demand = $\frac{Percentage\ change\ in\ quantity\ demanded}{Percentage\ change\ in\ price}$

0.5 =  $\frac{Percentage\ change\ in\ quantity\ demanded}{8}$

Percentage change in quantity demanded = 0.5 × 8

                                                                       = 4%

Therefore, if the price rises by 8% then as a result quantity demanded decreases by 4%.