Mechanic

If the price elasticity of demand is −2 and the price of the product decreases by 5%, the quantity demanded will:

A) increase 5%.

B) decrease 2%.

C) increase 10%.

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If the price elasticity of demand is −2, and the price of the product decreases by 5%, the quantity demanded will increase 10%. The value, −2, indicates that the percentage increase in the quantity demanded will be twice the percentage decrease in price.

Mechanic

If the price elasticity of a linear demand curve is −1 at the current price, an increase in price will lead to:

A) no change in total revenue.

B) an increase in total revenue.

C) a decrease in total revenue.

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On a linear demand curve, demand is elastic at prices above the point of unitary elasticity, so a price increase will decrease total revenue.

Mechanic

A good is most likely to demonstrate higher price elasticity of demand:

A) when there are few substitutes for the good, than when there are many good substitutes.

B) if it represents a small portion of the consumer’s budget, than if it represents a large portion.

C) in the long run than the short run.

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A good is likely to show a high price elasticity of demand when there are good substitutes, it represents a large proportion of consumer spending, and in the long run as consumers make changes that take time to implement in response to price changes for the good.