Question : Statement 1: If the price elasticity of demand for a product is -0.2, demand is considered inelastic.
Statement 2: Inelastic demand implies that a change in price leads to a proportionately smaller change in quantity demanded.
Option 1: Both statements are true.
Option 2: Both statements are false.
Option 3: Statement 1 is true, and statement 2 is false.
Option 4: Statement 1 is false, and statement 2 is true.
Correct Answer: Statement 1 is true, and statement 2 is false.
Solution : The correct answer is (C) Statement 1 is true, and statement 2 is false.
Statement 1 is true. The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. If the price elasticity of demand is -0.2, it indicates that a 1% change in price will lead to a 0.2% change in quantity demanded. In this case, the demand is considered inelastic because the percentage change in quantity demanded is proportionately smaller than the percentage change in price.
Statement 2 is false. Inelastic demand implies that a change in price leads to a proportionately smaller percentage change in quantity demanded, not necessarily a proportionately smaller absolute change. Inelastic demand means that consumers are less responsive to price changes, and as a result, the percentage change in quantity demanded is smaller than the percentage change in price. However, the absolute change in quantity demanded can still be significant depending on the magnitude of the price change.
Therefore, Statement 1 is true, and statement 2 is false.