When the price of a good is $10, the quantity demanded is 100 units per day.
Which combination of price change and price elasticity of demand will cause the largest increase in the quantity demanded for the good?
| Price Change | Price Elasticity of Demand |
|--------------------|----------------------------|
| A price falls to $9 | 0.8 |
| B price falls to $9 | 1.2 |
| C price rises to $11| 0.8 |
| D price rises to $11| 1.2 |
Answer (2)
The combination that causes the largest increase in quantity demanded is Option B, where the price falls to $9 with a price elasticity of demand of 1.2, resulting in an increase of 1.2 units. Options that involve price increases lead to a decrease in quantity demanded. Hence, lowering the price while having higher elasticity is the best strategy.
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To determine which scenario causes the largest increase in quantity demanded, we need to consider both the price change and the price elasticity of demand. Price elasticity of demand measures how responsive the quantity demanded is to a change in price.
Price Elasticity of Demand Formula :
Percentage Change in Quantity Demanded = Price Elasticity of Demand × Percentage Change in Price
Let's analyze each option:
Option A: Price falls to $9, with elasticity 0.8 :
Original price = $10
New price = $9
Price change = − 1
Percentage change in price = 10 − 1 × 100 = − 10%
Percentage change in quantity demanded = 0.8 × ( − 10 ) = − 8%
Option B: Price falls to $9, with elasticity 1.2 :
Percentage change in quantity demanded = 1.2 × ( − 10 ) = − 12%
Option C: Price rises to $11, with elasticity 0.8 :
Original price = $10
New price = $11
Price change = 1
Percentage change in price = 10 1 × 100 = 10%
Percentage change in quantity demanded = 0.8 × 10 = 8%
Option D: Price rises to $11, with elasticity 1.2 :
Percentage change in quantity demanded = 1.2 × 10 = 12%
Comparing the options, Option B causes the largest decrease in both percentage change in price and increase in quantity demanded due to its higher elasticity. Therefore, Option B (price falls to $9 with price elasticity of demand 1.2) will cause the largest increase in the quantity demanded for the good.
