Question

A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded?

Answer 1

Answer: The quantity demanded is decreased by 20%.

Step-by-step explanation:

Since we have given that

Price elasticity of demand = 2

Percentage change in price  = (+)10%

We need to find the percentage change in quantity demanded.

As we know the formula:

$e_D=\dfrac{\text{\% change in quantity demanded}}{\text{\% change in price}}\\\\2=\dfrac{x}{10}\\\\x=20\%$

As we know that there is inverse relationship between the price and quantity demanded.

Hence, the quantity demanded is decreased by 20%.