Final answer:
The correct answer is a) Decrease, 1.25%, meaning if the price increases by 1%, the quantity demanded will decrease by 1.25%. This highlights how price change inversely affects demand based on the product's price elasticity.
Step-by-step explanation:
A price elasticity of demand of -1.25 means that if the price increases by 1%, the quantity demanded will decrease by 1.25%. The correct answer to the student's question is a) Decrease, 1.25%. This concept is vital in understanding consumer behavior and how price changes can affect the quantity of goods demanded. Price elasticities of demand are usually negative numbers that we read as absolute values to indicate the responsive nature of quantity demanded to price changes.
As an example of price elasticity, consider a product whose demand has an elasticity of 1.4. If a company lowers the product's price, they can expect the quantity demanded to increase by a higher percentage, potentially offsetting the decreased price and increasing total revenue.
Conversely, if the product had a price elasticity of 0.6, the company might benefit from increasing the price since the decrease in quantity demanded would be smaller than the percentage change in price, possibly leading to higher total revenue.