If the Government Wants to Reduce the Consumption of Water

question 87

Multiple Choice

If the government wants to reduce the consumption of water by 5%, and the price elasticity of demand for water is - 0.4, the government should:

• A) raise the price of water by 0.08%
• B) raise the price of water by 2%
• C) lower the price of water by 0.4%
• D) raise the price of water by 12.5%

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Definitions:

Inferior Good

A type of product whose demand decreases when the income of consumers increases and vice versa.

Demand Coefficient

A measure that indicates the sensitivity or responsiveness of the quantity demanded of a good or service to changes in its price.

Normal Good

A good for which demand increases as the income of individuals or the economy grows, and decreases when income falls.

Income Responsiveness

The degree to which demand for a product or service changes in response to changes in consumer income.