Answer to Question #262470 in Microeconomics for Edna

Question

20. Given the electricity shortages observed in Durban in 2019, the South African government wants

to reduce electricity consumption by 5%. The price elasticity for electricity is 0.4, therefore

government should

(4 Marks)

a) Increase the price of electricity by 12.5%

b) Decrease the price of electricity by 2%

c) Increase the price of electricity by 10%

d) Decrease the price of electricity by 6%

Answer 1

Correct Option: a) Increase the price of electricity by 12.5%

Price elasticity of demand for electricity = (% change in quantity / % change in price)

0.4 = (0.05 / % change in price)

% change in price = 0.05 / 0.4 = 12.5