Final answer:
The price elasticity of demand is calculated as -1.5, indicating a relatively elastic demand where a 10% increase in price leads to a 15% decrease in quantity demanded. Price elasticities are viewed as absolute values, hence the negative sign signifies an inverse relationship between price and demand. Hence, the correct answer is option (A).
Step-by-step explanation:
The price elasticity of demand measures how the quantity demanded of a good responds to a change in the price of that good. To calculate the elasticity, we use the formula: Price Elasticity of Demand (PED) = (% change in quantity demanded) / (% change in price). In the scenario provided, when then price of a product is increased by 10%, the quantity demanded decreases by 15%. Therefore, the PED is calculated as -15% / 10%, which equals -1.5.
Price elasticities of demand are always negative because the relationship between price and quantity demanded is inversely proportional, meaning when price goes up, demand goes down, and vice versa. Hence, we look at the absolute value when interpreting the elasticity.
Since the absolute value of -1.5 is greater than 1, we can say the product has a relatively elastic demand, meaning consumers are quite sensitive to price changes. As the percentage decrease in quantity demanded is larger than the percentage increase in price, the demand reaction is relatively strong.