Question

A government wants to reduce electricity consumption by 10%. The price elasticity of demand for electricity is -5. The government must ________ the price of electricity by ________.

Answer 1

increase

2%

Step-by-step explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

5 = 10 / percentage change in price

percentage change in price = 10%/5 = 2%

Demand is elastic because the elasticity of demand is greater than 1 in absolute terms. So, if price is increased, there would be a greater change in quantity demanded.