Suppose the elasticity of demand for cereal is 1. If cereal increases in price by 25 percent, how much will the quantity demanded decrease by?

Question

25 percent

There is not enough information given to answer the question.

12.5 percent

1 percent

Answer 1

The elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in price. If the elasticity of demand for cereal is 1, this indicates that the demand is unitary elastic.

When demand is unitary elastic (elasticity = 1), the percentage change in quantity demanded is equal to the percentage change in price.

In this case:

• Price increases by 25 percent.
• Therefore, the quantity demanded will decrease by the same percentage, which is also 25 percent.

So, the correct answer is:

25 percent