Multiple choice

The requirement is to identify which of the situations indicates inelastic demand. Elasticity of demand is measured by the percentage change in the quantity demanded divided by the percentage change in price. If the quotient is greater than one, demand for product is price elastic, and if it less than one, demand for the product is price inelastic. A quotient of exactly one indicates unitary elasticity. In which of the following situations would there be inelastic demand?

  1. A 5% price increase results in 3% decrease in the quantity demanded.

  2. A 4% price increase results in a 6% decrease in the quantity demanded.

  3. A 4% price increase results in a 4% decrease in the quantity demanded.

  4. A 3% price decrease results in 5% increase in the quantity demanded.

  5. None of these
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A Correct answer
Explanation

Correct, because the price elasticity quotient is equal to 0.6 (3%/5%).

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