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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.

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Solution

Initial price (P)=Rs.1
Rise in price by 100 per cent =1×100100=Rs.1
New price (P1)=Rs.1+Rs.1=Rs.2
Given: P=Rs.1;P1=Rs.2;P=P1P=Rs.2Rs.1=Rs.1
Quantity Q=601=60 units;Q1=602=30 units;Q=Q1Q=(3060)units=30 units
Price elasticity of demand (Ed)=()PQ×QP
=()160×301
=12=0.5
Price elasticity of demand =0.5

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