A price increase of 8% is offset by an equal 8% decrease in quantity demanded. How is that demand described?
Correct Answer
A) Unit elastic
If the percent change in price is offset by an equal percent change in quantity demanded, demand is unit elastic.
Why This Is the Correct Answer
Option A is correct because the 8% price increase is offset by an equal 8% decrease in quantity demanded. The ratio is 8% / 8% = 1, and an equal percent change in price and quantity is defined as unit elastic demand.
Why the Other Options Are Wrong
Option B: Elastic
Option B, elastic, is wrong because elastic demand requires the quantity change to exceed the price change, a ratio above 1. Here 8% / 8% equals 1, not more.
Option C: Inelastic
Option C, inelastic, is wrong because inelastic demand requires the quantity change to be smaller than the price change, a ratio below 1. Here the changes are equal, giving a ratio of 1.
Option D: Perfectly inelastic
Option D, perfectly inelastic, is wrong because perfectly inelastic demand means quantity does not change at all when price changes. Here quantity fell 8%.
Equal changes equal unit
If price and quantity move by the same percent, the ratio is one, and one means unit elastic.
How to use: Use this when the price and quantity changes in a question are the same size.
Exam Tip
When the two percentages match, choose unit elastic; save inelastic for a smaller quantity change and elastic for a larger one.
Common Mistakes to Avoid
- -Calling equal changes inelastic
- -Confusing perfectly inelastic with unit elastic
- -Ignoring that the ratio is exactly one
Concept Deep Dive
Analysis
This question tests the definition of unit elasticity. When a percent change in price is matched by an equal percent change in quantity demanded, the ratio is exactly 1. Here an 8% price rise and an 8% quantity drop give a ratio of 1, which is unit elastic.
Background Knowledge
Elasticity of demand compares the percent change in quantity demanded with the percent change in price. A ratio above 1 is elastic, below 1 is inelastic, exactly 1 is unit elastic, and zero response is perfectly inelastic.
Real-World Application
An appraiser reviewing a parking garage study sees that an 8% rate increase led to an 8% drop in monthly permits. She notes that demand is unit elastic, so total revenue stayed roughly the same.
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