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A consumer buys 20 units of a good at a price of Rs. 5 per unit. He incurs an expenditure of Rs. 120 when he buys 24 units. Calculate price elasticity of demand using the percentage method. Comment upon the likely shape of demand curve based on this information. |
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Answer» Solution :`{:("Initial Price (P) = 5","Initial Expenditure = 100","Initial QUANTITY (Q) = 20"),("New Price "(P_(1)),,),(=("Exp.")/("Quantity")=(120)/(24)=5,"New Expenditure = 120","New Quantity "(Q_(1))=24),(Delta P = 0,,Delta Q = 4):}` `PED=(Delta Q)/(Delta P)XX(P)/(Q)=(4)/(0)xx(5)/(20)=(20)/(0)=oo` ED is perfectly elastic as price does not change at all in response to change in quantity demanded. Thus, its DEMAND curve will be horizontal/parallel to x - axis. |
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