If the price elasticity of demand is 2, this means that a _____________ increase in price causes a ____________ decrease in quantity demanded.
A. 15%; 100%
B. 15%; 10%
C. 20%; 40%
D. 30%; 20%
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To determine the answer, we need to understand the concept of price elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to changes in price.
If the price elasticity of demand is 2, it means that a 1% increase in price will result in a 2% decrease in quantity demanded (and vice versa). The formula for price elasticity of demand is:
Price elasticity of demand = percentage change in quantity demanded / percentage change in price
Let's apply this formula to the options provided:
A. 15% increase in price causes a 100% decrease in quantity demanded. The price elasticity of demand would be 100% / 15% = 6.67, which is not equal to 2.
B. 15% increase in price causes a 10% decrease in quantity demanded. The price elasticity of demand would be 10% / 15% = 0.67, which is not equal to 2.
C. 20% increase in price causes a 40% decrease in quantity demanded. The price elasticity of demand would be 40% / 20% = 2, which is equal to 2.
D. 30% increase in price causes a 20% decrease in quantity demanded. The price elasticity of demand would be 20% / 30% = 0.67, which is not equal to 2.
Based on the calculations, option C is the correct answer. A 20% increase in price causes a 40% decrease in quantity demanded, which corresponds to a price elasticity of demand of 2.