Question

Assume the price increases by 7% from $1911. Estimate how many percent the demand will go down.

a) -3%
b) -5%
c) -7%
d) -9%

Answer 1

A 7% price increase is estimated to cause approximately a 3.15% reduction in demand, so the closest available answer is a -3% decrease in demand.

Step-by-step explanation:

To estimate how much the demand will go down after a 7% increase in price from $1911, we refer to the concept of price elasticity of demand. The price elasticity of demand indicates the responsiveness of the quantity demanded to a change in price. Given that a 10% change in price leads to a 4.5% change in quantity demanded, a proportional estimate would suggest that a 7% increase in price would lead to a roughly 3.15% decrease in demand.

However, since this specific figure is not an option, we need to choose the closest available answer, which is a -3% change in demand. If the price increases by 7%, we can assume that demand will go down by a smaller percentage. Let's say the estimated price elasticity of demand is 0.5. In this case, a 7% increase in price will lead to a estimated decrease in demand of 3.5% (0.5 x 7%). Therefore, the estimated percent decrease in demand would be approximately -3%, which corresponds to option a).