If the price elasticity of demand for a good is -0.25, what effect does a 1 percent increase in price have on quantity demanded?

In microeconomics, the price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. Specifically, when the price elasticity of demand is -0.25, it indicates that the demand for the good is inelastic. This means that the quantity demanded will change, but by a smaller percentage than the change in price.

When there is a 1 percent increase in price, the negative elasticity of -0.25 suggests that the quantity demanded will decrease by 0.25 percent. This is calculated using the elasticity formula:

% Change in Quantity Demanded = Price Elasticity of Demand × % Change in Price.

Substituting the values gives us:

% Change in Quantity Demanded = -0.25 × 1% = -0.25%.

Thus, the correct interpretation is that a 1 percent increase in price results in a 0.25 percent decrease in quantity demanded. This illustrates the concept that for inelastic goods, consumers do not significantly reduce their demand even when prices increase, leading to a relatively small decrease in quantity demanded.