Question

Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is 0.25, by how much would you have to raise the price of water?

1) 10 percent
2) 25 percent
3) 40 percent
4) 100 percent

Answer 1

To achieve a 10 percent reduction in water consumption with a price elasticity of demand of 0.25, the manager would need to raise the price by 40 percent.

Step-by-step explanation:

If you are the manager of a local water company and need to persuade consumers to decrease their water usage by 10 percent with a price elasticity of demand for water of 0.25, you need to determine the necessary price increase. The price elasticity of demand measures how much the quantity demanded will change in response to a price change. The formula that links price elasticity (E), percentage change in quantity demanded (Q), and percentage change in price (P) is E = Q / P.

Since you want to reduce quantity demanded by 10 percent (Q = -10 percent), and you know that E = 0.25, you can rearrange the formula to solve for the needed percentage change in price:

P = Q / E

P = (-10%) / 0.25

P = -40%

Therefore, you would need to raise prices by 40 percent to achieve a 10 percent decrease in water consumption with a price elasticity of demand of 0.25.