Question

Gasoline prices recently increased by 20%, and the purchase of gasoline decreased by 5%. What is the price elasticity of demand?

1.0

0.20

0.25

2.0

Answer 1

Price elasticity of demand (PED) is calculated using the formula:

\[
\text{Price Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}
\]

In this case, the percentage change in quantity demanded is a decrease of 5%, which we can express as -5%. The percentage change in price is an increase of 20%, which we can express as +20%.

Now plug in the values:

\[
\text{Price Elasticity of Demand} = \frac{-5\%}{20\%} = \frac{-5}{20} = -0.25
\]

When calculating PED, we typically look at the absolute value, so we take:

\[
|\text{Price Elasticity of Demand}| = 0.25
\]

Thus, the price elasticity of demand is **0.25**.

The correct answer is: **0.25**.