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A consumer spends Rs.60 on a good priced at Rs.5 per unit. When price falls by 20 percent, the consumer continues to spend Rs.60 on the good. Calculate price elasticity of demand by percentage method. |
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Answer» Solution :Given : Initial Total Expenditure `(TE_(0))`=Rs.60 FINAL Total Expenditure `(TE_(1))`=Rs.60 Initial Price `(P_(0))`=Rs.5 Percentage change in price =-Rs.20 Percentage change in price = `(P_(1)-P_(0))/(P_(0))xx100` `-20=(P_(1)-5)/(5)xx100` `(-100)/(100)=P_(1)-5` `P_(1)=4`  Now, `E_(d)=(-)("Percentage change in quantity DEMANDED")/("Percentage change in price")` `E_(d)=(-)((Q_(1)-Q_(0))/(Q_(0))/(Q_(0))xx100` `E_(d)=(-)((15-12)/(12)xx100)/(-20)` `E_(d)=(-)(25)/(-20)` `E_(d)=1.25` `THEREFORE E_(d)=1.25` THUS, the price ELASTICITY of demand is 1.25. |
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