What is Price Elasticity of Demand and How is it Calculated?

How is Price Elasticity of Demand calculated?

If price increases by 5 percent and quantity demanded decreases by 2 percent, what is the absolute value of Price Elasticity of Demand?

A. 2.1

B. 5.0

C. 0.4

D. 10.0

Answer:

The absolute value of the price elasticity of demand, given a 2% decrease in quantity demanded and a 5% increase in price, is calculated as 0.4. Therefore the correct answer is C. 0.4.

Explanation: The question you've asked pertains to the calculation of the price elasticity of demand, which is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Specifically, to find the absolute value of price elasticity of demand, we calculate the percentage change in quantity demanded divided by the percentage change in price.

When we apply the given numbers: Price Elasticity of Demand = (2% Decrease in Quantity Demanded) / (5% Increase in Price). The absolute value of the price elasticity of demand is then 0.4, because 2% (absolute value) divided by 5% = 0.4, hence the correct answer is C. 0.4.