When the price of a good rises 10% and the quantity demanded falls 4%, how do economists describe demand for that good?
Correct Answer
B) Inelastic
If the percent change in quantity demanded is less than the percent change in price, demand is inelastic. Here 4% is less than 10%.
Why This Is the Correct Answer
Option B is correct because the percent change in quantity demanded (4%) is less than the percent change in price (10%). The elasticity is |-4%| / 10% = 0.4, and a value below 1 means demand is inelastic.
Why the Other Options Are Wrong
Option A: Elastic
Option A, elastic, is wrong because elastic demand requires the quantity response to be larger than the price change, a ratio greater than 1. Here the ratio is 4% / 10% = 0.4, which is less than 1.
Option C: Unit elastic
Option C, unit elastic, is wrong because unit elasticity requires equal percent changes, a ratio of exactly 1. A 4% quantity change against a 10% price change gives 0.4, not 1.
Option D: Perfectly elastic
Option D, perfectly elastic, is wrong because perfectly elastic demand implies an infinite quantity response to any price change. Here quantity fell only 4% after a 10% price rise, a ratio of 0.4.
Less response means inelastic
Divide the quantity change by the price change. Under 1 is inelastic, over 1 is elastic, and exactly 1 is unit elastic.
How to use: Use this whenever a question gives a price change and a quantity change and asks for the elasticity label.
Exam Tip
Ignore the minus sign and compare the size of the two percentages; the smaller quantity change here points to inelastic.
Common Mistakes to Avoid
- -Calling demand elastic whenever quantity falls at all
- -Dividing price change by quantity change instead of the reverse
- -Confusing unit elastic with any moderate response
Concept Deep Dive
Analysis
This question tests price elasticity of demand. Compare the percent change in quantity demanded with the percent change in price. Here quantity falls 4% while price rises 10%, so the ratio is 0.4, which is less than 1, meaning demand is inelastic.
Background Knowledge
Price elasticity of demand compares how much quantity demanded changes relative to a change in price. A ratio greater than 1 is elastic, less than 1 is inelastic, and exactly 1 is unit elastic.
Real-World Application
An appraiser studying a rental market sees rents rise 10% while occupied units fall only 4%. She recognizes that demand for housing in that area is relatively inelastic, which helps explain why landlords could raise rents without large vacancy increases.
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