Q.17 If a 10% decrease in the price o... [FREE SOLUTION]

Chapter 6: Q.17 (page 153)

If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?

Short Answer

Expert verified

Elasticity grows as price and quantity fall, the second $10 %$ decline in price would be expected to be accompanied by a quantity increase of more than 8%.

Step by step solution

Step 1:Definition

Total Utility and Marginal Utility:

In economics, total utility and marginal utility are concepts under utility that assist determine a consumer's level of satisfaction. The total utility refers to the whole amount of pleasure derived by a customer from the consumption of a specific amount of products. Marginal utility, on the other hand, refers to the additional utility gained by a consumer from the consumption of one additional unit of the good.

Explanation

A second ten percent reduction in price does not imply a rise in demand of another eight percent. As prices continue to fall, demand elasticity will rise in general. With this second identical price cut, demand is anticipated to increase by more than 8%.

Step 3:Conclusion

It is true since, considering demand elasticity increases as price and quantity fall, the subsequent 10% price drop should be accompanied by a quantity increase of more than 8%.