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Your firm sells a product facing a Price Elasticity of Demand = -1.55. What change in price would...

Question:

Your firm sells a product facing a Price Elasticity of Demand = -1.55. What change in price would lead to a 12% rise in Quantity Demanded?

a. -2.64%

b. -7.74%

c. -13.7%

d. 31.4%

Price Elasticity of Demand:

The price elasticity of demand is a measure of how elastic or sensitive the quantity demanded of a commodity in response to changes in the price of that commodity. The formula for the price elasticity of demand is {eq}\eta = \frac{\%\triangle Q_d}{\%\triangle P} {/eq}.

Answer and Explanation: 1

A list of information given in the problem is shown below.

Given:

{eq}\text{price elasticity of demand: }\eta = -1.55 \\\text{percentage change in quantity demanded: } \%\triangle Q_d = 12\% {/eq}

To solve for the change in price that would lead to a 12% rise in quantity demanded, we use the following formula for the price elasticity of demand.

{eq}\eta = \frac{\%\triangle Q_d}{\%\triangle P} {/eq}

Since {eq}\eta = -1.55 {/eq} and {eq}\%\triangle Q_d = 12\% {/eq}, then the above equation becomes:

{eq}-1.55 = \frac{12\%}{\%\triangle P} \\\%\triangle P= \frac{12\%}{-1.55 } \\\%\triangle P= -7.74 \% {/eq}

The change in price that would lead to a 12% rise in quantity demanded is -7.74%. The price of the product has to fall by 7.74% so that the quantity demanded increases by 12%.

The answer is letter b. -7.74%.


Learn more about this topic:

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Price Elasticity of Demand in Microeconomics

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Chapter 2 / Lesson 11
21K

In microeconomics, the principle of price elasticity of demand is important to understand. Learn the definition of price elasticity of demand, understand the formula and its categories, and see some calculation examples.


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