Final answer:
The price elasticity of demand for the product, given a price increase from $100 to $120 and a 40% decrease in quantity demanded, is calculated as 2.0, indicating that the product is price elastic.
Step-by-step explanation:
The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. In this case, if a company increases its price from $100 to $120, that is a 20% increase in price.
If the quantity demanded fell by 40 percent as a result, then the price elasticity of demand would be the absolute value of the percentage change in quantity demanded divided by the percentage change in price, which is |-40%|/20% = 2.
This indicates that the price elasticity of demand for this product is 2, meaning the product is elastic. Products with an elasticity greater than 1 are considered elastic, meaning consumers are quite responsive to price changes.