Question

Suppose the quantity demanded of a particular good increases by 30%, and (the absolute value of) the price elasticity of demand of this good is known to be 2. How must the price have changed?a. it increased by 15%b. it decreased by 66%c. it decreased by 15%d. it increased by 66%

Answer 1

Answer: Option (c) is correct.

Explanation:

Given that,

Quantity demanded increases by = 30%

Price elasticity of demand = 2

Therefore,

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

2 = $\frac{30}{Percentage\ change\ in\ prices}$

Percentage change in prices = $\frac{30}{2}$

                                                = 15%

Therefore, price of a particular good decreases by 15%.