If a 10 percent decrease in price raises quantity demanded by 20 percent, the price elasticity of demand is:

If a 10 percent decrease in price raises quantity demanded by 20 percent, the price elasticity of demand is:

• A. 10.0
• B. 2.0
• C. 0.5
• D. 20.0

Answer: (B)

Price elasticity of demand measures how much quantity demanded responds to a price change. It is the percent change in quantity demanded divided by the percent change in price. In this case, price falls by 10% and quantity demanded rises by 20%. So the elasticity magnitude is 20% / 10% = 2. Because the quantity moves in the opposite direction to the price, the elasticity would be negative if you include the sign; the option given uses the magnitude, which is 2.0. This also shows the demand is elastic (|PED| > 1): a 1% decrease in price would be expected to raise quantity demanded by about 2%.

Price elasticity of demand measures how much quantity demanded responds to a price change. It is the percent change in quantity demanded divided by the percent change in price.

In this case, price falls by 10% and quantity demanded rises by 20%. So the elasticity magnitude is 20% / 10% = 2. Because the quantity moves in the opposite direction to the price, the elasticity would be negative if you include the sign; the option given uses the magnitude, which is 2.0. This also shows the demand is elastic (|PED| > 1): a 1% decrease in price would be expected to raise quantity demanded by about 2%.