Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is −.25, by how much would you have to raise the price of water?

A) 10 percent
B) 25 percent
C) 40 percent
D) 100 percent

Question

Jenifer Mahone · Accepted Answer

Final Answer : C, Explanation :  The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. In this case, we want to reduce consumption by 10%, so we need to raise the price by enough to cause a 10% decrease in demand. The price elasticity of demand is -0.25, which means that a 1% increase in price will lead to a 0.25% decrease in demand. Therefore, to reduce demand by 10%, we need to raise the price by 10% / 0.25% = 40%.

Definitions

Learning Objectives

Learning Objectives

Related questions