If the absolute value of the price elasticity of demand for good X is 0.5, then a 10% decrease in the price of good X will result in which of the following?

Question

BlackTom AI · Accepted Answer

First, restating the scenario: the absolute value of the price elasticity of demand for good X is 0.5, which means demand is inelastic. A 10% decrease in price is given, and we examine its effects on quantity demanded and revenue.
Option 1: 'A 5% decrease in the quantity demanded of Good X' This is clearly incorrect because a decrease in price, all else equal, leads to an increase—not a decrease—in quantity demanded when there is any positive slope in the demand curve. With elasticity inelastic (|E| = 0.5), the quantity demanded will rise, albeit by a smaller percentage than the price fall.
Option 2: 'A 5% increase in revenues from the sale of Good X' This confuses the quantity effect with total revenue. While quantity demanded increases by 5% (since elasticity is 0.5 and price falls 10%), total revenue does not necessarily rise by 5%. Because demand is inelastic, a price drop reduces revenue overall, so revenue is not increasing by 5%.
Option 3: 'A 5% increase in the quantity demanded of Good X' This matches the elasticity calculation: percentage change in quantity demanded = elasticity × percentage change in price = 0.5 × (−10%) = −5% for price and +5% for quantity. The sign convention shows quantity rises by 5% when price falls by 10%, which is consistent with the definition of elasticity for a downward price movement.
Option 4: 'A 10% decrease in revenues from the sale of Good X' This statement concerns revenue, and the magnitude could be plausible given inelastic demand, but the exact percentage requires combining price and quantity effects. With a 10% price drop and a 5% quantity increase, total revenue changes by −10% + 5% = −5%. So the revenue decrease is 5%, not 10%. Therefore this option overstates the revenue decline.
Option 5: 'A 10% increase in revenues from the sale of Good X' This is inconsistent with the inelastic demand scenario and the computed revenue effect, which shows revenue falling, not rising, when price falls by 10% and quantity rises by only 5%.
In summary, the key ideas are: an elastic value less than 1 means price decreases reduce total revenue, the quantity increases by half the percentage change in price when elasticity is 0.5, and the net revenue effect combines both changes. The only option that correctly reflects the direction of the quantity change is the 5% increase in quantity demanded, while revenue would actually fall by 5% under these numbers.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

If the absolute value of the price elasticity of demand for good X is 0.5, then a 10% decrease in the price of good X will result in which of the following?

View Explanation

Log in for full answers

Similar Questions

When there are many substitute products available, the price elasticity of demand for a given product will likely be Blank ______.

When a 10 percent decrease in price results in a less than 10 percent increase in quantity sold, the demand for the product or service is described as Blank ______.

The own-price elasticity of Starbucks coffee is -0.8, meaning __.

There are many different factors that impact the price elasticity of demand. More specifically, the proportion of budget and the income effect refer to how price as a portion of income influences price elasticity. Which of the following is true

Rock melon has a price of elasticity of demand of (-)2.95, it can be concluded that the demand for rock melons is ___________.

The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realise an increase in revenue?

Shoes are priced at $75 per pair. A vendor sells 20 pairs per day. The vendor explores selling at $100 per pair. At that price, the vendor sells 15 pairs over the day. What is the elasticity of shoe sales to price.

A luxury handbag brand raises prices by 10% but experiences only a 2% drop in volume. Demand is:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler