SACE Stage 2 Economics Practice Questions - SACE Stage 2 Economics External Assessment Exam

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A boutique bakery increases the price of its artisanal sourdough bread by 15%, resulting in a 5% decrease in total sales revenue. What does this reveal about the price elasticity of demand for this bread?

Demand is price inelastic, as price and total revenue move in the same direction. Demand is price elastic, because the percentage drop in quantity demanded exceeded the percentage increase in price. Demand is perfectly inelastic, as revenue changed independently of quantity. Demand is unit elastic, because revenue and price changed proportionally.

Correct Answer:

Demand is price elastic, because the percentage drop in quantity demanded exceeded the percentage increase in price.

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