Question

Assume the demand for electricity, a necessity with few substitutes, is 0.2. If the electric company raised its rates by 10 percent, we would expect Multiple Choice
A. a 10 percent decrease in quantity demanded.
B. a 2 percent increase in quantity demanded.
C. a 10 percent increase in quantity demanded.
D. a 2 percent decrease in quantity demanded.
E. a 5 percent decrease in quantity demanded.

Answer 1

Answer:

D. a 2 percent decrease in quantity demanded.

Explanation:

We must remember that Price elasticity is calculate as follows:

↓Q / ΔP

If Ep = 0.2 and ΔP = 10% = 10/100 = 0.10

Then:

↓Q/0.10 = 0.2

↓Q = 0.2 x 0.10 = 0.02 = 2%

The customer demand is quite inelastic thus, aren't quite price sensitive to move to other goods.