Question

A consumer spends $Rs.400$ on a good priced at $Rs.8$ per unit. When its price rises by $25$ per cent, the consumer spends $Rs.500$ on the good. Calculate the price elasticity of demand by the percentage method.

Answer 1

Initial price $\left(P\right)=Rs.8$
Rise in price by $25$ per cent $=8\times \frac{25}{100}=Rs.2$
New price $\left(P_1\right)=Rs.8+Rs.2=Rs.10$

Price (Rs.)	Expenditure (Rs.)	Quantity Demanded (Units)
$8$	$400$	$\frac{400}{8}=50$
$10$	$500$	$\frac{500}{10}=50$

Percentage change in quantity demanded $=\frac{△Q}{Q}\times 100=\frac{50-50}{50}\times 100=\frac{0}{50}\times 100=0$
Price elasticity of demand $\left(E_d\right)=(-)\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$
$=(-)\frac{0}{25\%}$
$=0$
Price elasticity of demand $=0\left(zero\right)$.