Question

If ε = -3.2, this means that

A) each 1% increase in quantity demanded causes price to decrease by 3.2%
B) each 1 unit increase in quantity demanded causes price to decrease by $3.20
C) each 1% increase in price causes quantity demanded to decrease by 3.2%
D) each $1 increase in price causes quantity demanded to decrease by 3.2 units

Answer 1

The correct answer is C) each 1% increase in price causes quantity demanded to decrease by 3.2%, indicating a relatively elastic demand where quantity is sensitive to price changes.

Step-by-step explanation:

If ε = -3.2, this indicates that each 1% increase in price causes the quantity demanded to decrease by 3.2%. This is a measure of the price elasticity of demand, which shows how the quantity demanded will change in response to a change in the price of a good or service. Since price elasticities of demand are negative numbers due to the inverse relationship between price and quantity demanded, an elasticity of -3.2 signifies a relatively elastic demand, where quantity responds strongly to changes in price.

Therefore, the correct answer is C) each 1% increase in price causes quantity demanded to decrease by 3.2%. This relationship is a cornerstone of economic understanding of how markets function, and it is critical for businesses to know as it affects pricing strategies and revenue.