Practicing Success
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 ___________. |
10% 20% 30% 15% |
20% |
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. |