Multiple Choice
If the demand for a good is elastic, which of the following is most likely to occur when the price of the good increases?
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4. Elasticity
Price Elasticity of Demand on a Graph
Multiple Choice
Suppose the value of the price elasticity of demand is -3. What does this indicate about consumer response to price changes?
A
A 1% increase in price leads to a 3% decrease in quantity demanded.
B
A 3% increase in price leads to a 1% decrease in quantity demanded.
C
Demand is perfectly inelastic.
D
Consumers do not respond to price changes.
Verified step by step guidance1
Recall the definition of price elasticity of demand, which measures the responsiveness of quantity demanded to a change in price. It is given by the formula:
\[\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\]
Note that the price elasticity of demand is given as -3. The negative sign indicates the inverse relationship between price and quantity demanded, which is typical for most goods (as price increases, quantity demanded decreases).
Interpret the magnitude of the elasticity: an elasticity of -3 means that for every 1% increase in price, the quantity demanded changes by 3% in the opposite direction (decreases in this case).
Use the elasticity formula to express this relationship:
If \(\% \Delta P = +1\%\), then
\[\% \Delta Q = \text{Elasticity} \times \% \Delta P = -3 \times 1\% = -3\%\]
Conclude that a price elasticity of -3 indicates consumers are quite responsive to price changes, with a 1% increase in price leading to a 3% decrease in quantity demanded.
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