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      Question

      If the price elasticity of demand for a commodity is

      0.5, a 10% increase in its price will lead to:
      A 20% decrease in quantity demanded Correct Answer Incorrect Answer
      B 0.5% decrease in quantity demanded Correct Answer Incorrect Answer
      C 5% decrease in quantity demanded Correct Answer Incorrect Answer
      D No change in quantity demanded Correct Answer Incorrect Answer

      Solution

      Solution Price Elasticity of Demand (Ed) is: Ed=% change in quantity demanded / % change in price Given Data

      • Ed=0.5
      • % change in price=+10%
      We need to find: % change in quantity demanded Apply the Formula % change in quantity demanded=Ed×% change in price =0.5×10%=5% Because price increased, the quantity demanded will decrease. Interpretation When Ed < 1 (here 0.5), demand is inelastic, meaning the percentage change in quantity demanded is smaller than the percentage change in price. Final Answer: A. 5% decrease in quantity demanded

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