When the price of knit scarves decreases by 7 percent, their sales increases 7 percent. This example shows ______ demand.

	a.	unit elastic
	b.	perfectly inelastic
	c.	perfectly elastic
	d.	unit inelastic

Expert Solution

Option A Unit Elastic

Price Elasticity of Demand is the ratio of the percentage change in the quantity demanded of a product to a percentage change in its price. The formula is as follows.

Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

= 7 / 7 = 1. Since Elasticity is equal to 1, so this shows that demand is unitary elastic.

A demand is said to be unitary elastic when the percentage change in quantity demanded is equal to the percentage change in price (Ed = 1). The total revenue area stays the same in this case.

Option B is wrong. Perfectly Inelastic Demand is a condition in which the quantity demanded does't change as the price changes (Ed = 0). The demand curve is a Vertical line, the demand will stay the same regardless of price.

Option C is wrong. In case of Perfectly Elastic Demand, a small percentage change in price brings about an infinite percentage change in quantity demanded (Ed=infinity). The demand curve is a horizontal line and buyers are willing to buy only at that price.

Option D is wrong. In case of inelastic demand a percentage change in price will cause a smaller percentage change in quantity demanded, So, unitary inelastic is not possible as unitary means that equal percenatge of change in quantity demanded with change in price.

Rahul Sunny answered 2 years ago

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