Question

A consumer spends $Rs.60$ on a good priced at $Rs.1$ per unit. When the price rises by $100$ per cent, he continues to spend $Rs.60$ on the good. Calculate the price elasticity of demand by percentage method.

Answer 1

Initial price $\left(P\right)=Rs.1$
Rise in price by $100$ per cent $=1\times \frac{100}{100}=Rs.1$
New price $\left(P_1\right)=Rs.1+Rs.1=Rs.2$

Given: $P=Rs.1;P_1=Rs.2;△P=P_1-P=Rs.2-Rs.1=Rs.1$

Quantity $Q=\frac{60}{1}=60units;Q_1=\frac{60}{2}=30units;△Q=Q_1-Q=(30-60)units=-30units$

Price elasticity of demand $\left(E_d\right)=(-)\frac{P}{Q}\times \frac{△Q}{△P}$

$=(-)\frac{1}{60}\times \frac{-30}{1}$

$=\frac{1}{2}=0.5$

Price elasticity of demand $=0.5$