If a 20 percent decline in price leads to a 10 percent increase in quantity demanded, the price elasticity of demand is:

If a 20 percent decline in price leads to a 10 percent increase in quantity demanded, the price elasticity of demand is:

• A. 20.0
• B. 0.5
• C. 2.0
• D. 10.0

Answer: (B)

Elasticity of demand measures how much the quantity demanded responds to a price move. It is the ratio of the percent change in quantity demanded to the percent change in price: Ed = (%ΔQd) / (%ΔP). Here, price falls by 20% and quantity demanded rises by 10%. So Ed = 10% / (−20%) = −0.5. The magnitude is 0.5, which is the value shown as 0.5 in the options. The negative sign reflects the usual inverse relationship between price and quantity demanded, and a magnitude of 0.5 means demand is inelastic: quantity responds less than proportionally to price changes. Because the price drop is not offset by a large rise in quantity, total revenue would tend to fall.

Elasticity of demand measures how much the quantity demanded responds to a price move. It is the ratio of the percent change in quantity demanded to the percent change in price: Ed = (%ΔQd) / (%ΔP).

Here, price falls by 20% and quantity demanded rises by 10%. So Ed = 10% / (−20%) = −0.5. The magnitude is 0.5, which is the value shown as 0.5 in the options. The negative sign reflects the usual inverse relationship between price and quantity demanded, and a magnitude of 0.5 means demand is inelastic: quantity responds less than proportionally to price changes. Because the price drop is not offset by a large rise in quantity, total revenue would tend to fall.