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A consumer spends Rs.100 on a good priced at Rs.4 per unit. When its price falls by 25 percent, the consumer spends Rs.75 on the good. Calculate the price elasticity of demand by the percentage method. |
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Answer» Solution :GIVEN : Initial Total EXPENDITURE `TE_(0)`=Rs.100 Final Total Expenditure `TE_(1)`=Rs.75 Initial PRICE P0=Rs.4 Percentage change in price =-25 Percentage change in price `=(P_(1)-P_(0))/(P_(0))xx100` `25=(P_(1)-4)/(4)xx100` `100=P_(1)-4xx100` `(100)/(100)=P_(1)-4` `P_(1)=4-1=3` `{:("Price (P)","Total Expenditure TE=Price P"xx"Quantity Q","Quantity Q=TEP"),(P_(0)=Rs.4,TE_(0)=Rs.100,Q_(0)=25),(P_(1)=Rs.3,TE_(1)=Rs.75,Q_(1)=25):}` Now, Ed=Percentage change in quantity demanded `dev` Percentage change in price Percentage change in `Q=(Q_(1)-Q_(0))/(Q_(0))xx100` `=(25-25)/(25)xx100=0` Ed`=(0)/(1)=0` THUS, the price elasticity of demand is 0. |
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