John works for the economic research department of the local cable company in hi

Question

John works for the economic research department of the local cable company in his city. He is interested in the effect of a price increase in the demand for their services. He calculates that the price elasticity for the demand is -3. This means: Cable services are a Giffen good. A unit increase in price will induce a 3 unit of services decrease in consumption. Demand will fall approximately by 3% if price increases by 1 %. Demand will increase by 3% if price increases by 1%. Demand will not change if price is increased

Explanation / Answer

The price elasticity of demand is -3.

This implies that 1% change in price will lead to 3% change in quantity demanded.

In other words, 1% increase in the price of cable service will lead to 3% decrease in quantity demanded of cable service and 1% decrease in price of cable service will lead to 3% increase in quantity deamnded of cable service.

So,

It can be stated that demand will fall approximately by 3% if price increases by 1%.

Hence, the correct answer is the option (3) [Demand will fall approximately by 3% if price increases by 1%].

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