Question

Suppose the government grants a subsidy to the producers for every car produced. The change in the amount sold will be greater when:


there is a greater number of close substitutes available to the consumer


the price elasticity of demand is inelastic.


the price elasticity of demand for cars is greater


the amount of the subsidy is smaller

Answer 1

The change in the amount sold will be greater when the price elasticity of demand is greater than 1. (option 3).

What is price elasticity of demand?

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

Demand is elastic when the coefficient of demand is greater than one. This means that for a small change in price, the quantity demanded would be greater.

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