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A consumer spends Rs.400 on a good priced at Rs.8 per unit. When its price rises by 25 percent, the consumer spends Rs.500 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.400` Final Total Expenditure `TE_(1)`=Rs.500 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=TEP"),(P_(0)=Rs.8,TE_(0)=Rs.400,Q_(0)=50),(P_(1)=Rs.10,TE_(1)=Rs.500,Q_(1)=50):}` Now, `ED=("Percentage change in quantity demanded")/("Percentage change in price")` Percentage change in Quantity `= (Q_(1)-Q_(0))/(Q_(0))xx100` `=(50-50)/(50)xx100` =0 `ED=("Percentage change in quantity demanded")/("Percentage change in price")` `=(0)/(25)` Ed=0 Thus, the price elasticity of demand is 0. |
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