Given a downward-sloping linear demand curve, in which price range is the price elasticity of demand greater than 1 (i.e., demand is elastic)?

• A. At lower prices and higher quantities
• B. At higher prices and lower quantities
• C. At the midpoint of the demand curve
• D. At all price ranges

Answer: (B)

Verified step by step guidance

1. Recall the definition of price elasticity of demand (PED), which measures the responsiveness of quantity demanded to a change in price. It is calculated as \(PED = \left| \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} \right|\).
2. Understand that for a linear demand curve, the elasticity varies along the curve because the percentage changes in price and quantity differ at different points.
3. Recognize that at higher prices and lower quantities, a small percentage decrease in price leads to a relatively larger percentage increase in quantity demanded, making demand elastic (PED > 1).
4. At lower prices and higher quantities, the percentage change in quantity demanded is smaller relative to the percentage change in price, so demand tends to be inelastic (PED < 1).
5. Note that at the midpoint of a linear demand curve, the price elasticity of demand is exactly 1 (unit elastic), dividing the elastic and inelastic regions.