The price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10 percent. What is the new quantity demanded?
a.1,000
b.4,000
c.4,500
d.6,000
Answer:B
Choice "b" is correct. The choice is derived from the following calculations:
Price elasticity of demand = % Change in quantity demanded / % Change in price 2.0 (Given) = 20% (Solve) /10% (Given)% Change in quantity demanded (20%) = X units (new) - 5,000 units (old) 15,000 units (old) = 4,000 units
We can assume the inverse relationship of price to quantity demanded, such that when price increases， quantity demanded decreases. As such, a 20 percent change in quantity demanded will be a decrease of 20 percent (from 5,000 units to 4,000 units).
Choice "a" is incorrect. The 1,000 units represent the unit change in quantity demanded to obtain a price elasticity of demand of 2.0, not the new units of quantity demanded.
Choice “c” is incorrect. Using the 4,500 units as the new quantity demanded results in a price elasticity of demand of 1.0.
Choice “d" is incorrect. Using the 6,000 units as the new quantity demanded incorrectly assumes that price and quantity demanded have a positive relationship.