Question

2. A price elasticity of demand for Good X equal to -.85 implies
[A] if price increases by $1.00, quantity demanded will decrease by .85.
[B] if price decreases by $0.85, quantity demanded will increase by 1.
[C] a price of $1.00 will result in sales increase of .85 units.
[D] if price increases by 1%, quantity demanded will decrease by .85%.
[E] if price increases by 1%, demand will decrease by .85%.

Answer 1

Answer: Option (D) is correct.

Explanation:

Price elasticity of demand for Good X = -0.85

Price increases by = 1%

Therefore,

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

$0.85 = \frac{percentage\ change\ in\ quantity\ demanded}{1}$

Percentage change in quantity demanded = 0.85

Hence, price elasticity of demand of -0.85 implies that if price increases by 1% then as a result quantity demanded decreases by 0.85%.