ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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0.5
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-2.0
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2.0
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-0.5
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Detailed explanation-1: -Income Elasticity = Percentage change in quantity demanded / Percentage change in income. Income Elasticity =-5% / 10% =-0.5.
Detailed explanation-2: -Answer and Explanation: The correct answer choice is B. Demand is said to be price elastic when the value of price elasticity is greater than one. Here, the given percentage change in quantity demanded is 15, while the given percentage change in price is 10 implying that the price elasticity of demand is 1.5.
Detailed explanation-3: -Thus, the answer is (d). A 10 percent increase in the price will cause a 5 percent decrease in the quantity demanded.
Detailed explanation-4: -So, if the price of a good increases by 10 percent and the quantity demanded decreases by only 5 percent, that good is said to have inelastic demand. The quantity demanded does not stretch much relative to the change in price.
Detailed explanation-5: -As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, then the product is considered to be elastic (for example, the price goes up by 5%, but the demand falls by 10%).