If The Elasticity Of Demand For X Is 0.25 Then Moving Along

If The Elasticity Of Demand For X Is 025 Then Moving Along The Deman

If the elasticity of demand for X is 0.25, then moving along the demand curve for Good X involves understanding how price changes affect quantity demanded. Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. A value of 0.25 indicates inelastic demand, meaning that quantity demanded is relatively insensitive to price changes. Specifically, a 1% change in price results in a 0.25% change in quantity demanded in the opposite direction.

Analyzing the options:

Option a states that a 10% increase in the price of X will lead to a 25% decrease in the quantity demanded. To verify this, we use the formula relating percentage change in quantity demanded to price elasticity:

Percentage change in quantity demanded = Elasticity × Percentage change in price

Applying the figures:

0.25 × 10% = 2.5%

This indicates a 2.5% decrease in quantity demanded, not 25%. Therefore, option a overstates the effect.

Option b claims that a 10% increase in price results in a 2.50% decrease in quantity demanded. Using the same calculation, the elasticity suggests this is accurate, as 0.25 × 10% = 2.5%. This matches the theory of inelastic demand, where the responsiveness is low.

Option c states that a 20% increase in price leads to a 2.50% rise in demand, which contradicts the law of demand; price increases typically decrease demand. Furthermore, the percentage change in demand should be negative with a price increase when demand is downward sloping, so this option is inconsistent with basic economic principles.

Option d claims that a 10% rise in price will result in a 12.50% increase in demand, which is illogical because demand generally falls when prices rise, especially with inelastic demand. Additionally, using elasticity:

0.25 × 10% = 2.5%, not 12.5%, and the sign should be negative, indicating a decrease, not increase.

In conclusion, the correct interpretation based on the elasticity of 0.25 is that a 10% increase in price will lead to a 2.5% decrease in the quantity demanded, making option b the correct choice.

Paper For Above instruction

The concept of price elasticity of demand is fundamental in understanding consumer responsiveness to price changes. It is a measure used by economists to quantify how much the quantity demanded of a good responds to changes in its price. Elasticity helps businesses and policymakers forecast the effects of pricing strategies, taxes, and other economic policies on consumer behavior and market outcomes. In this paper, we analyze the implications of a demand elasticity of 0.25 for Good X and examine how price changes influence demand based on this elasticity.

Price elasticity of demand (PED) is mathematically expressed as:

PED = (% Change in Quantity Demanded) / (% Change in Price)

A PED value of 0.25 indicates highly inelastic demand, where the responsiveness of consumers to price changes is minimal. This means that even significant price changes will result in relatively small changes in quantity demanded. Specifically, a 1% increase in price will only lead to a 0.25% decrease in the quantity demanded, and vice versa.

This inelastic characteristic is common in essential goods or products with few substitutes, where consumers lack alternatives or are less sensitive to price fluctuations. For example, certain medications or basic utilities often exhibit inelastic demand because consumers cannot easily reduce consumption when prices rise.

Using this knowledge, businesses can predict and strategize pricing mechanisms. When demand is inelastic, raising prices can lead to increased total revenue because the percentage increase in price outweighs the percentage decrease in demand. Conversely, lowering prices in such markets might reduce overall revenue, despite increasing sales volume.

In the context of the multiple-choice options provided, we observe that the key is understanding the percentage change in quantity demanded resulting from a change in price. The formula used to determine this is straightforward: multiply the price elasticity of demand by the percentage change in price. If the elasticity is 0.25, then for any price change, the change in quantity demanded is 0.25 times that change, expressed as a negative for price increases indicating the law of demand.

Applying this to the options:

  • Option a: A 10% rise in price leading to a 25% fall in quantity demanded implies a PED of 2.5, which conflicts with the given elasticity of 0.25. Therefore, this option is inconsistent with the provided data.
  • Option b: A 10% increase in price causes a 2.5% decrease in demand, aligning perfectly with the elasticiy:
  • 0.25 × 10% = 2.5%

This confirms that option b accurately describes the demand response for Good X with the given elasticity.

  • Option c: A 20% increase in price leading to a 2.5% rise in demand contradicts the law of demand because demand typically decreases when price increases, especially with elasticities less than 1.
  • Option d: A 10% increase in price resulting in a 12.5% increase in demand is both illogical and inconsistent with the principle that demand decreases as price increases.

In summary, understanding the precise relationship between price changes and demand elasticity enables accurate prediction of consumer behavior. The calculations affirm that a demand elasticity of 0.25 implies that small percentage increases in price result in proportionally smaller percentage decreases in demand, specifically 0.25 times the increase in price. Therefore, only option b correctly represents this relationship.

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