ICAEW BIP · Chapter 4 · Question 5 of 11
When a company raised the price of a product from £20 to £22, monthly demand fell from 5,000 units to 4,400 units. Using the original price and quantity as the base, what is the price elasticity of demand and how is demand described?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) -1.2: demand is elastic
Explanation
Percentage change in quantity = (4,400 - 5,000) / 5,000 = -12%. Percentage change in price = (£22 - £20) / £20 = +10%. PED = -12% / 10% = -1.2. Ignoring the sign, the value is greater than 1, so demand is elastic and the price rise reduces total revenue.
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