Question

Microeconomics

Posted 3 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) $5 \%$
(B) $+1 \%$
(C) $-1 \%$
(D) $-25 \%$
(E) $+25 \%$
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Answer from Sia

Posted 3 months ago

Solution

a

Definition of Price Elasticity of Demand: The price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as $\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

b

Given Data: The price elasticity of demand for the breakfast cereal is 5, and the price decreases by 5%

c

Calculation: Using the formula for PED, we can rearrange it to find the percentage change in quantity demanded: $\% \text{ change in quantity demanded} = \text{PED} \times \% \text{ change in price}$. Substituting the given values, we get $\% \text{ change in quantity demanded} = 5 \times (-5\%) = -25\%$

Answer

(D) $-25\%$

Key Concept

Price Elasticity of Demand

Explanation

The price elasticity of demand quantifies how much the quantity demanded of a good responds to changes in its price. In this case, a PED of 5 indicates that for every 1% decrease in price, the quantity demanded increases by 5%. Therefore, a 5% decrease in price results in a 25% increase in quantity demanded.

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