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Chapter 6: Problem 6

A 5 percent increase in the price of sugar causes the quantity demanded to fall by 15 percent. The demand for sugar is (LO1) a) perfectly elastic d) inelastic b) elastic e) perfectly inelastic c) unit elastic

Short Answer

Expert verified
The demand for sugar is elastic (option b). This is because the price elasticity of demand for sugar is -3, which falls into the category of elastic demand (E_d > 1).

Step by step solution

01

The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated using the formula: Price Elasticity of Demand (E_d) = \(\frac{% Change in Quantity Demanded}{% Change in Price}\) #Step 2: Identify the given changes in price and quantity demanded#

From the exercise, we are given: 1. A 5% increase in the price of sugar (which means a positive 5% change in price) 2. A 15% fall in the quantity demanded (which means a negative 15% change in quantity demanded) #Step 3: Calculate the price elasticity of demand#
02

Plug the given values into the price elasticity of demand formula: E_d = \(\frac{-15\%}{5\%}\) E_d = -3 The calculated price elasticity of demand for sugar is -3. #Step 4: Interpret the result and select the correct category of elasticity#

Based on the calculated price elasticity of demand, we can interpret the result as follows: 1. If E_d = 0, demand is perfectly inelastic. 2. If 0 < E_d < 1, demand is inelastic. 3. If E_d = 1, demand is unit elastic. 4. If E_d > 1, demand is elastic. 5. If E_d = -∞, demand is perfectly elastic. In our case, the price elasticity of demand for sugar is -3, which means the demand for sugar is elastic (option b).

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Most popular questions from this chapter

Which statement is the most accurate? (LO7, 5) a) The demand for gasoline is very elastic. b) The demand for home heating oil is very inelastic. c) The seller of a perishable commodity has a relatively elastic supply. d) Most firms can double their output in the short run.

Movie tickets and DVD rentals are services. (LO4) a) inferior b) complementary c) substitute d) highly inelastic

If demand is inelastic and price is raised, total revenue will (LO3) a) rise b) fall c) stay the same d) possibly rise or possibly fall

Statement 1. When demand is inelastic and price is lowered, total revenue will rise. Statement 2. Demand is unit elastic when elasticity is one. (LO3) a) Statement 1 is true, and statement 2 is false. b) Statement 2 is true, and statement 1 is false. c) Both statements are true. d) Both statements are false.

Demand is elastic when (LO1) a) percentage change in price is greater than percentage change in quantity b) percentage change in quantity is greater than percentage change in price c) the demand curve is vertical d) price increases raise total revenue
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