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When Luna Hair Salon raised its hair cut prices by 10% because of an increase in rent cost, it...

Question:

When Luna Hair Salon raised its hair cut prices by 10% because of an increase in rent cost, it lost a quarter of its customers. The price elasticity of demand for its hair cut is:

a) 4

b) 0.25

c) 0.4

d) 2.5

What Is The Price Elasticity Of Demand:

The Price Elasticity Of Demand is an economic metric that measures the impact of an increase or decrease of the selling price of a given good or service on its quantity demanded. A price elastic good is one whose quantity demanded has a inverse relationship with its price.

Answer and Explanation: 1

The Price elasticity of demand is computed as follows:

Price elasticity of demand = % Change in quantity demanded / % Change in price

  • % Change in quantity demanded = one quarter = - 25%
  • % Change in price = 10% cut = -10%

Price elasticity of demand = -0.25 / -0.1

= 2.5

The answer is thus D.


Learn more about this topic:

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Price Elasticity of Demand: Definition, Formula & Example

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Chapter 3 / Lesson 54
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Learn what price elasticity is. Discover how to find price elasticity of demand, study examples of price elasticity, and examine a price elasticity graph.


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