Explanation: The concept of price elasticity of demand is crucial in understanding how changes in price affect the quantity demanded of a good. When the price of a good increases, the quantity demanded typically decreases, and vice versa. This relationship is described by the law of demand.
In this problem, we are given that the price of chips increases by 25%. We need to determine the percentage decrease in the quantity demanded for the same price. The key to solving this problem is understanding the inverse relationship between price and quantity demanded.
The formula to calculate the percentage change in quantity demanded when the price changes is:
\[
\text{Percentage change in quantity demanded} = \frac{100}{100 + \text{percentage increase in price}} \times 100
\]
Substituting the given percentage increase in price (25%) into the formula, we get:
\[
\text{Percentage change in quantity demanded} = \frac{100}{100 + 25} \times 100 = \frac{100}{125} \times 100 = 80\%
\]
This means that the quantity demanded is 80% of the original quantity, which is a 20% decrease. Therefore, the correct answer is 20%.
It is important to note that the percentage decrease in quantity demanded is not equal to the percentage increase in price. The relationship is inverse, and the formula accounts for this inverse relationship. Students often make the mistake of assuming a direct relationship, which leads to incorrect answers.
Understanding this concept is essential for various competitive examinations and real-world applications in economics and business. The law of demand and price elasticity of demand are fundamental principles that help in making informed decisions about pricing and production.