Final answer:
With a price elasticity of demand for cars of 1.2, a 10 percent increase in car prices is expected to cause a 12 percent decrease in the quantity demanded.
Step-by-step explanation:
The price elasticity of demand (PED) measures how the quantity demanded of a good responds to a change in its price, and it is usually negative. Since the PED for cars is 1.2, this indicates that the demand for cars is elastic, meaning that car consumers are responsive to changes in price. Given a 10 percent rise in the price of cars, we would expect the percentage change in the quantity demanded to be affected accordingly.
By applying the elasticity value, we can calculate the expected percentage change in quantity demanded using the following:
Percentage change in quantity demanded = PED × Percentage change in price
= 1.2 × 10%
= 12%
Therefore, if the price of a car rises by 10 percent, we expect the quantity demanded to decrease by 12 percent.