If the price changes by 20 percent and the own-price elasticity of demand is 0.5, the quantity demanded changes by approximately

If the price changes by 20 percent and the own-price elasticity of demand is 0.5, the quantity demanded changes by approximately

• A. 5 percent
• B. 20 percent
• C. 10 percent
• D. 2 percent

Answer: (C)

The idea being tested is how to use own-price elasticity of demand to estimate how much quantity demanded changes when price changes. Elasticity measures responsiveness: ε = (%ΔQ) / (%ΔP). With an elasticity of 0.5, a 20 percent increase in price yields a quantity change of about ε × %ΔP = 0.5 × 20% = 10%. Since price rises, quantity demanded falls, so the change is roughly a 10 percent decrease. The other options don’t match the calculated magnitude: 5% would require elasticity 0.25, 20% would require elasticity 1, and 2% would require elasticity 0.1.

The idea being tested is how to use own-price elasticity of demand to estimate how much quantity demanded changes when price changes. Elasticity measures responsiveness: ε = (%ΔQ) / (%ΔP). With an elasticity of 0.5, a 20 percent increase in price yields a quantity change of about ε × %ΔP = 0.5 × 20% = 10%. Since price rises, quantity demanded falls, so the change is roughly a 10 percent decrease. The other options don’t match the calculated magnitude: 5% would require elasticity 0.25, 20% would require elasticity 1, and 2% would require elasticity 0.1.