Question

Macroeconomics

Posted 4 months ago

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The price elasticity of demand for a brand of breakfast cereal is 5 .
Based on this elasticity, what will be the percentage change in the quantity of breakfast cereal bought as a result of a $5 \%$ decrease in the cereal's price?
Choose 1 answer:
(A) $-1 \%$
(B) $5 \%$
(C) $+25 \%$
(D) $-25 \%$
(E) $+1 \%$
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Answer from Sia

Posted 4 months ago

1 Solution

a

Price Elasticity of Supply (PES) Definition: The price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price

b

PES Formula: The formula for calculating the price elasticity of supply is $PES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$

c

Time Period and PES: The price elasticity of supply for raspberries is likely to be more elastic over two years than over two days because suppliers have more time to adjust their production in response to price changes

1 Answer

The price elasticity of supply for raspberries is likely more elastic over two years than over two days.

Key Concept

Price Elasticity of Supply (PES)

Explanation

PES measures how much the quantity supplied responds to a change in price, and it is generally more elastic over longer time periods.

2 Solution

a

Price Elasticity of Demand (PED) and Total Revenue: The price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price

b

PED and Total Revenue Relationship: If the price elasticity of demand is greater than 1 (elastic), a decrease in price will lead to an increase in total revenue

c

PED for Apples: Given that the price elasticity of demand for apples is 3 (elastic), a decrease in price will increase the total revenue from selling apples

2 Answer

If the price elasticity of demand for apples is 3, a decrease in price will increase total revenue.

Key Concept

Price Elasticity of Demand (PED) and Total Revenue

Explanation

When demand is elastic (PED > 1), a price decrease leads to a proportionally larger increase in quantity demanded, thus increasing total revenue.

3 Solution

a

Calculating Percentage Change in Quantity Demanded: To find the percentage change in quantity demanded, we use the price elasticity of demand formula $PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

b

Applying the Formula: Given a PED of 5 and a price decrease of 5%, the percentage change in quantity demanded is $5 \times 5\% = 25\%$

3 Answer

The percentage change in the quantity of breakfast cereal bought as a result of a 5% decrease in the cereal's price is +25%.

Key Concept

Calculating Percentage Change in Quantity Demanded

Explanation

The percentage change in quantity demanded is calculated by multiplying the price elasticity of demand by the percentage change in price. With a PED of 5 and a 5% price decrease, the quantity demanded increases by 25%.

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