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If the price elasticity of demand = |-0
If the price elasticity of demand = |-0.5| and price decreases by 10 percent, then
A. demand will increase by 0.5 percent.
B. quantity demanded will increase by 0.5 percent, and the demand is elastic.
C. quantity demanded will increase by 0.5 percent, and the demand is inelastic.
D. quantity demanded will increase by 5 percent, and the demand is elastic.
E. quantity demanded will increase by 5 percent, and the demand is inelastic.
Expert Solution
- The correct option is E. Quantity demanded will increase by 5 percent, and the demand is inelastic.
Mathematically,
Elasticity = Change in the quantity demanded/Change in the price level
0.5 = Change in the quantity demanded / 10%
By solving this we get, the change in the quantity demanded as 5%. Also, as per the law of demand, there is an inverse relationship between price and quantity demanded. So, there is an increase in the quantity demanded by 5%.
Further, the change in the quantity demand is less than the change in the price level. Thus, demand is inelastic.
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