Fill in the blanks a The price elasticity of demand for a fi

Fill in the blanks:

a. The price elasticity of demand for a firm’s product is equal to –2.25 over the range of prices being considered by the firm’s manager. If the manager increases the price of the product by 9 percent, the manager predicts the quantity demanded will ________ (increase, decrease) by ________ percent.

b. The price elasticity of demand for an industry’s demand curve is equal to –2.25 for the range of prices over which supply decreases. If total industry output is expected to decrease by 14 percent as a result of the supply decrease, managers in this industry should expect the market price of the good to ________ (increase, decrease) by ________percent.

Solution

Answer a.

The price elasticity of demand for a firm’s product is equal to -2.25 over the range of prices being considered by the firm’s manager. If the manager increases the price of the product by 9 percent, the manager predicts the quantity demanded will decrease by 20.25 percent.

Price Elasticity = % Change in Quantity Demand / % Change in Price
-2.25 = % Change in Quantity Demand / 9.00%
% Change in Quantity Demand = -20.25%

Answer b.

The price elasticity of demand for an industry’s demand curve is equal to -2.25 for the range of prices over which supply decreases. If total industry output is expected to decrease by 14 percent as a result of the supply decrease, managers in this industry should expect the market price of the good to increase by 31.50 percent.

Price Elasticity = % Change in Quantity Demand / % Change in Price
-2.25 = % Change in Quantity Demand / -14.00%
% Change in Quantity Demand = 31.50%