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Question
Microeconomics
Posted 2 months ago

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%5 \% decrease in the cereal's price?

Choose 1 answer:
(A) 5%5 \%
(B) +1%+1 \%
(C) 1%-1 \%
(D) 25%-25 \%
(E) +25%+25 \%
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Answer from Sia
Posted 2 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 PED=% change in quantity demanded% change in price \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: % change in quantity demanded=PED×% change in price \% \text{ change in quantity demanded} = \text{PED} \times \% \text{ change in price} . Substituting the given values, we get % change in quantity demanded=5×(5%)=25% \% \text{ change in quantity demanded} = 5 \times (-5\%) = -25\%
Answer
(D) 25%-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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