If the elasticity of demand for a microwave oven is 1.5, this means A. few substitutes exist

B. a 1% decrease in price will lead to a 15% increase in quantity demanded

C. a 5% decrease in price will lead to a 7.5% increase in quantity demanded

D. a 10% increase in price will lead to a 150% decrease in quantity demanded

Can anyone explain to me how to answer this question? Thanks!

An elasticity of demand that is 1.5 means that C. a 5% decrease in price will lead to a 7.5% increase in quantity demanded.

It also means that the price elasticity of demand is positive. A decrease in price by 5% affects the quantity demanded by more than 1.

Data and Calculations:

The elasticity of demand = Percentage Change in Quantity Demanded/Percentage Change in Price

This price elasticity of demand can be represented by these symbol, QΔ%/PΔ%.

Where:

Δ% = Percentage Change  

Q = Quantity demanded  

P = Price of the good

For instance, with Option C, the 7.5% increase in the quantity demanded and a 5% decrease in price will demonstrate the price elasticity of demand to be as follows:

= 1.5 (7.5%/5%)

Thus, the elasticity of demand that is 1.5 means Option C.

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C. a 5% decrease in price will lead to a 7.5% increase in quantity demanded

Explanation:

We find the answer by usin the price elasticity of demand formula

Price elasticity = %change in quantity demanded/% in price

Now, we plug the correct amounts into the formula

1.5 = 7.5% / 5 %

So we can see that the correct answer is C because the division of 7.5 by 5, gives us a result of 1.5.

An elasticity of 1.5 means that the good is relatively elastic: this means that the quantity demanded will change more than the price. We can see that this is true for this example: the quantity demanded changed by 7.5%, while the price changed by 5%.

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