Suppose that the point price elasticity of demand for a good is constant and equ

Question

Suppose that the point price elasticity of demand for a good is constant and equal to   -0.5

. Which of the following best explains what this means?

1. For a one percent increase in price, the decrease in demand will always be approximately 5 percent.

2. For a one percent increase in price, the percent decrease in demand will always be approximately 0.5 percent.

3. For a 5 percent increase in price, the decrease in demand will always be approximately one percent.

4. For a 0.5 percent increase in price, the decrease in demand will always be approximately 5 percent.

Explanation / Answer

Answer
2. For a one percent increase in price, the percent decrease in demand will always be approximately 0.5 percent.
The price elasticity of demand is a sensitiveness of quantity because of change in price when other things are constant
the price and demand are negatively related so when price increases the demand decreases.

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