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A consumer spends Rs.1,000 on a good priced at 10 per unit. When its price falls by 20 percent, the consumer spends Rs.800 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.1000 Final Total Expenditure `(TE_(1))`=Rs.800 Initial Price `(P_(0))`=Rs.10 Percentage CHANGE in price =-20 Percentage change in price = `(P_(1)-P_(0))/(P_(0))xx100` `-20=(P_(1)-10)/(10)xx100` `-(200)/(100)=P_(1)-10` `P_(1)=8` `{:("Price (P)","Total Expenditure (TE)=Price (P)"xx "Quantity (Q)","Quantity (Q)"=(TE)/(P)),(P_(0)=Rs.10,TE_(0)=Rs.1000,Q_(0)=100),(P_(1)=Rs.8,TE_(1)=Rs.800,Q_(1)=100):}` Now, `E_(d)=(-) ("Percentage change in quantity demanded")/("Percentage change in price")` `E_(d)=(-)((Q_(1)-Q_(0))/(Q_(0))xx100)/(-20)` `E_(d)=(-)((100-200)/(100)xx100)/(-20)` `E_(d)=0` `therefore E_(d)=0` Thus, the price elasticity of demand is 0. |
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