Question

An economist estimated that the price elasticity of demand for new cars to be 0.87 if the price of cars declines by 40%. One would expect the quantity of new cars to:______

Answer 1

% change in quantity =34.8%

Step-by-step explanation:

Price elasticity of demand (PED) is the degree of responsiveness of demand to a change in price.

Where a percentage change in price produces a more than a proportional change in quantity, we say the product is price elastic. On the other hand, where a change in price produces a less than a proportional change in quantity demand, then demand is price inelastic

PED is computed as follows:

PED = % change in quantity /% change in Price

PED = 0.87

% change in Price = 40%

% change in Quantity =?

0.87 = y/40%/

Cross mulitiplying, we have

y = 0.87 × 40 = 34.8

Dividing both sides by 0.87

y = 34.8

% change in quantity = 34.8

% change in quantity =34.8