Final answer:
The statement that a 20% decrease in the price of foreign travel will increase the quantity demanded by 80% is correct when the price elasticity of demand is 4. Other options are incorrect as they either state that the demand is inelastic or that increases in prices lead to increases in demand, which contradicts the concept of price elasticity of demand.
Step-by-step explanation:
If the estimated price elasticity of demand for foreign travel is 4, we can determine the nature of demand and predict how changes in price will affect the quantity demanded. Price elasticity of demand is a measure of how responsive the quantity demanded of a good is to a change in its price.
Reviewing the Options
a. the demand for foreign travel is inelastic. - This statement is incorrect because if the price elasticity of demand is greater than 1, it indicates that the demand is elastic.
b. a 20% decrease in the price of foreign travel will increase the quantity demanded by 80%. - This statement is correct. According to the elasticity of 4, a 20% decrease in price leads to an 80% increase in quantity demanded (20% × 4 = 80%).
c. a 10% increase in the price of foreign travel will increase the quantity demanded by 40%. - This statement is incorrect because an increase in the price of a good with elastic demand will decrease, not increase, the quantity demanded.
d. a 20% increase in the price of foreign travel will increase the quantity demanded by 80%. - This statement is incorrect for the same reason as option c and because an increase in price results in a decrease in quantity demanded.
The correct answer is option b. A 20% decrease in the price will indeed lead to an 80% increase in the quantity demanded when the price elasticity of demand is 4.