If a 10 percent increase in price leads to a 20 percent decrease in quantity demanded, the elasticity of demand is

If a 10 percent increase in price leads to a 20 percent decrease in quantity demanded, the elasticity of demand is

• A. 0.2
• B. 5.0
• C. 10.0
• D. 2.0

Answer: (D)

Elasticity of demand measures how much quantity demanded responds to a price change, calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, a 10 percent price increase leads to a 20 percent drop in quantity demanded. The ratio is 20% / 10% = 2 in magnitude, and with the inverse relationship, the sign is negative, so PED = -2. The magnitude being greater than 1 shows elastic demand. The correct numerical value is 2.0.

Elasticity of demand measures how much quantity demanded responds to a price change, calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, a 10 percent price increase leads to a 20 percent drop in quantity demanded. The ratio is 20% / 10% = 2 in magnitude, and with the inverse relationship, the sign is negative, so PED = -2. The magnitude being greater than 1 shows elastic demand. The correct numerical value is 2.0.