Question

The price elasticity of demand for widgets is 0.50 . Assuming no change in the demand curve for widgets, a 20 percent increase in price implies a:

A. 50 percent reduction in Q.
B. 10 percent reduction in Q.
C. 40 percent reduction in Q.
D. 20 percent reduction in Q.

Answer 1

With a price elasticity of demand of 0.50 for widgets, a 20% increase in price leads to a 10% reduction in the quantity demanded, making option B the correct answer.

Step-by-step explanation:

The price elasticity of demand for a product measures how much the quantity demanded of it changes in response to a change in the product's price. Given the price elasticity of demand for widgets is 0.50, we can determine the effect of a 20 percent increase in price on the quantity demanded.

Using the formula for percentage change in quantity demanded, which is the price elasticity multiplied by the percentage change in price, we calculate: 0.50 (elasticity) × 20% (price increase) = 10% reduction in quantity demanded. Therefore, the correct answer is B. 10 percent reduction in Q.