The Government wants to reduce the demand for electricity. If elasticity of demand for electricity is 0.5 it wants to reduce the demand by 10%, then it should increase the price of electricity by ___________.
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : 20%
To calculate the necessary price increase to reduce demand by 10%,you can use the formula :
Elasticity of demand = $\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$
Percentage change in price = $\frac{\text{Percentage change in quantity demanded}}{\text{Elasticity of demand}}$
Given that the elasticity of demand for electricity is 0.5 and the government wants to reduce demand by 10%, you can plug in these values:
Percentage change in price = 10/0.5
= 20 %
So, the government should increase the price of electricity by 20% to achieve a 10% reduction in demand.