If the price elasticity of demand for a good is 0.43 an increase in the price of the good will result in____________

Analyze the question

The price elasticity of demand (PED) is 0.43. Since 0.43 < 1, demand is inelastic. We are asked what happens when the price increases.

Concept

PED = % change in quantity demanded ÷ % change in price

• If PED > 1 (elastic): quantity falls by a bigger percentage than the price rises, so total revenue falls when price rises.
• If PED < 1 (inelastic): quantity falls by a smaller percentage than the price rises, so total revenue rises when price rises.
• If PED = 1 (unitary): total revenue stays the same.

Solution

Suppose price rises by 10%. Then:

% change in quantity = 0.43 × 10% = 4.3% fall

Price rose by 10% but quantity fell by only 4.3%, so:

Let the original price be ₦100 and quantity 100 units. Revenue = ₦10,000.

• New price = ₦110
• New quantity = 95.7 units
• New revenue = 110 × 95.7 = ₦10,527

Revenue increased, so the seller makes a net gain. Since fewer units are also produced, costs fall or stay the same, which strengthens the gain.

Checking the options

• A and B: The 43% figure is the elasticity coefficient, not a percentage change in profit. Both are incorrect.
• C: A net loss would occur if demand were elastic. Incorrect.
• D: A net gain matches inelastic demand. Correct.

Answer: D, a net gain

Exam tip

Remember: "Inelastic: price and revenue move together." If PED < 1, a price increase raises revenue. If PED > 1, a price increase lowers revenue. Essential goods like salt, garri and petrol typically have inelastic demand, so sellers can raise prices and still gain.