Question

A consumer spends $Rs.100$ on a good priced at $Rs.4$ per unit. When price falls by $50$ per cent, the consumer continues to spend $Rs.100$ on the good. Calculate price elasticity of demand by percentage method.

Answer 1

Initial price $\left(P\right)=Rs.4$
Fall in price by $50$ per cent $=4\times \frac{50}{100}=Rs.2$
New price $\left(P_1\right)=Rs.4-Rs.2=Rs.2$
Given, $P=Rs.4;P_1=Rs.2;△P=P_1-P=Rs.2-Rs.4=(-)Rs.2$
$Q=\frac{100}{4}=25units;Q_1=\frac{100}{2}=50units;△Q=Q_1-Q=(50-25)units=25units$
Price elasticity of demand $\left(E_d\right)=(-)\frac{P}{Q}\times \frac{△Q}{△P}$
$=(-)\frac{4}{25}\times \frac{25}{-2}=2$
Price elasticity of demand $=2$.