Suppose that the absolute value of the price elasticity of demand in the market for bread is equal to 2. Then, what would be the effect on the quantity demanded resulting from a 2% increase in the price of bread?

Question

Suppose that the absolute value of the price elasticity of demand in the market for bread is equal to 2.  Then, what would be the effect on the quantity demanded resulting from a 2% increase in the price of bread?

BlackTom AI · Accepted Answer

First, recall the concept: price elasticity of demand (Ed) = (% change in quantity demanded) / (% change in price). The problem states the absolute value of Ed is 2, which means |Ed| = 2. The price increases by 2%, so the percentage change in price is +2%. Because demand typically slopes downward, the quantity demanded changes in the opposite direction, so the % change in quantity demanded is Ed × %ΔP, with a negative sign: %ΔQd = -|Ed| × %ΔP = -2 × 2% = -4%. This indicates a 4% decrease in quantity demanded. Now examine the provided option: “It would fall by 4%.” This aligns with the calculation above, since a 2% price rise compounded with an elasticity of 2 yields a 4% drop in quantity demanded. If someone suggests different magnitudes, they would be ignoring the linear relation defined by the elasticity or misapplying the sign. In brief, because the elasticity is 2 in absolute value and the price increases by 2%, the quantity demanded falls by 4%, matching the option given. Moreover, the negative sign is essential: higher price reduces quantity demanded, not increases it. Any alternative phrasing that ignores the sign or the magnitude would be inconsistent with the elasticity concept. The key takeaway is the proportionality: a 2% price increase leads to a 2 × 2% = 4% drop in quantity demanded.}

SIPAIA6400_001-002_2025_3 - Microeconomic Analysis for International and Public Affairs Problem Set 1, Individual Portion

Suppose that the absolute value of the price elasticity of demand in the market for bread is equal to 2. Then, what would be the effect on the quantity demanded resulting from a 2% increase in the price of bread?

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SIPAIA6400_001-002_2025_3 - Microeconomic Analysis for International and Public Affairs Problem Set 1, Individual Portion

Suppose that the absolute value of the price elasticity of demand in the market for bread is equal to 2. Then, what would be the effect on the quantity demanded resulting from a 2% increase in the price of bread?

View Explanation

Log in for full answers

Similar Questions

If a company needs to raise the prices of some its products, it should choose to raise the prices of Blank ______ products because relatively fewer customers will stop buying the product as a result.

Calculate the price elasticity of demand for a change in price from $10.00 to $15.00. Price Quantity $10.00 20 $15.00 15

For substitutes, the cross-price elasticity is ___, the own price elasticity is ___.

If the price elasticity of demand coefficient is (-)1, total revenue will remain constant when price rises or price falls.

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Making Your Study Simpler

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