Question

A consumer spends $Rs.1,000$ on a good price at $Rs.8$ per unit. When price rises by $25$ per cent, the consumer continues to spend $Rs.1,000$ on the good. Calculate price elasticity of demand by percentage method.

Answer 1

Initial price $\left(P\right)=Rs.8$
Rise is price by $25$ per cent $=8\times \frac{25}{100}=Rs.2$
New price $\left(P_1\right)=Rs.8+Rs.2=Rs.10$
Given, $P=Rs.8;P_1=Rs.10;△P=P_1-P=Rs.10-Rs.8=Rs.2$
$Q=\frac{1,000}{8}=125units;Q_1=\frac{1,000}{10}=100units;△Q=Q_1-Q=(100-125)units=(-)25units$
Price elasticity of demand $\left(E_d\right)=(-)\frac{P}{Q}\times \frac{△Q}{△P}$
$=(-)\frac{8}{125}\times \frac{-25}{2}$
$=\frac{4}{5}=0.8$
Price elasticity of demand $=0.8$.