Question

9.   You read that the own-price elasticity for college tuition is -2.5. If price rises by 5%, what is the predicted change in quantity demanded (assuming all other factors equal)?

a. fall of 5%

b. fall of 12.5%

c. increase of 5%

d. increase of 12.5%

Answer 1

answer :

price elasticity is = -2.5

price rise = 5%

change in quantity demanded = ?

to find the change in quantity demanded we will put the given information in formula of price elasticity.

price elasticity = % change in quantity demanded / % change in price

% change in quantity demanded = price elasticity * % change in price  

putting the values in the formula :

% change in quentity demanded = -2.5* 5

= -12.5

so the predicted change in quantity demanded is 12.5 %

so if price rises by 5% the quantity demanded will decrease by 12.5%.

"the price elasticity is given in negative ( - 2.5) that means it follows law of demand that there is inverse relationship between demand and price. with the increase in price demand decreases and with the decrease in price quantity demand increase." so with the rise in price 5% the quantity demanded will decrease by 12.5%.

so b. fall of 12.5% is right answer.

* hope the explaination is clear to you. if you have any confusion feel free to ask.

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