Chapter 46, Problem 3MCQ

To determine

The correct option for price elasticity of demand.

Answer to Problem 3MCQ

Option b is correct.

Explanation of Solution

Given Information:

Price	Quantity demand
$2	100
$1	120

Explanation for the correct option:

b.

  $\begin{array}{c}\text{Price elasticity}=\frac{\left(\frac{\text{Change in quantity demanded}}{\text{Average quantity}}\right)}{\left(\frac{\text{Change in price}}{\text{Average price}}\right)}\\ =\frac{\frac{100-120}{\frac{100+120}{2}}}{\frac{\$2-\$1}{\frac{\$2+\$1}{2}}}\\ =\frac{\frac{20}{110}}{\frac{1}{1.5}}\\ =0.2727\end{array}$

Therefore, option b is the correct answer.

Explanation for incorrect options:

Since the question is numerically based, other options are incorrect.

Economics Concept Introduction

Income effect: Income effect shows the increasing purchasing power of a consumer when there is a change in the price level.

Substitution effect: Substitution effect shows the ability to substitute inferior good with a normal good due to a change in the price level.