How is the price elasticity of demand defined?
AThe percentage change in quantity demanded divided by the percentage change in price
BThe percentage change in price divided by the percentage change in quantity demanded
CThe dollar change in quantity demanded divided by the dollar change in price
DThe percentage change in quantity supplied divided by the percentage change in price
Answer & Solution
Correct answer: A. The percentage change in quantity demanded divided by the percentage change in price
1. Price elasticity of demand measures how responsive quantity demanded is to a price change.
2. It is defined as the percentage change in the quantity demanded of a good divided by the percentage change in its price.
3. Reversing the ratio, as in option B, would measure something other than demand's responsiveness.
4. Using dollar changes instead of percentage changes, as in option C, ignores the base level of price and quantity.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.1 | Price Elasticity of Demand and Price Elasticity of Supply_
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