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A consumer spends Rs.1000 on a good price at Rs.8 per unit. When price rises by 25 percent, the consumer continues to spend same amount on the good. Calculate price elasticity of demand by percentage method. |
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Answer» Solution :GIVEN : INITIAL Total Expenditure `(TE_(0))`=Rs.1000 Final Total Expenditure `(TE_(1))`=Rs.1000 Initial Price `(P_(0))`=Rs.8 Percentage change in price = +25% Percentage change in price = `(P_(1)-P_(0))/(P_(0))XX100` `25=(P_(1)-8)/(8)xx100` `(200)/(100)=P_(1)-8` `P_(1)=10` `{:("Price (P)","Total Expenditure (TE)=Price (P)"xx "Quantity (Q)","Quantity (Q)"=(TE)/(P)),(P_(0)=Rs.8,TE_(0)=Rs.1000,Q_(0)=125),(P_(1)=Rs.10,TE_(1)=Rs.1000,Q_(1)=100):}` Now, `E_(d)=(-)("Percentage change in quantity demanded")/("Percentage change in price")` `E_(d)=(-)((100-125)/(125)xx100)/(25)` `E_(d)=(-20)/(25)` `therefore E_(d)=0.8` Thus, the price ELASTICITY of demand is 0.8 |
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