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?

There is not enough information given to answer the question.

1 percent

12.5 percent

25 percent

1 answer

To determine the change in quantity demanded given the price increase, we can use the concept of price elasticity of demand (PED).

The formula for price elasticity of demand is:

\[ \text{Elasticity} = \frac{%\text{ change in quantity demanded}}{%\text{ change in price}} \]

In this case, we know:

  • Elasticity = 1 (which means demand is unit elastic)
  • %\text{ change in price} = +25%

We can rearrange the formula to find the percentage change in quantity demanded:

\[ %\text{ change in quantity demanded} = \text{Elasticity} \times %\text{ change in price} \]

Substituting the values in:

\[ %\text{ change in quantity demanded} = 1 \times (+25%) = +25% \]

Since the price increase leads to a decrease in quantity demanded, we have:

\[ %\text{ change in quantity demanded} = -25% \]

Therefore, the quantity demanded will decrease by 25 percent.

The answer is 25 percent.