Question

A government wants to reduce electricity consumption by 15%. The price elasticity of demand for electricity is -5. The government must ________ the price of electricity by ________.

Answer 1

Answer: Increase; 3%

Step-by-step explanation:

Price elasticity of demand measures the sensitivity of demand to a change in prices. When this measure is negative, it means that an increase in price, will result in a decrease in quantity demanded.

Formula is:

Price elasticity of demand = Change in Quantity demanded / Change in price

If the government wants to reduce consumption by 15%, the price increase should be:

-5 = -15% / p

-5p = -15%

p = -15%/-5

p = 3%