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Question

Comment upon the degree of elasticity of demand for Good X, in the following given situations, if the price of the commodity rises from Rs. 5 per unit ot Rs. 7 per unit and the quantity demanded falls from 20 units to 16 units:
(i) Using the total household expenditure method,
(ii) Using proportionate method.

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Solution

(i)
P×Q=TE6×20=1007×16=112

Since the price & total expenditure carry positive relation Ed<1, relatively inelastic demand.
(ii)Ed=Change in Quantity DemandedChange in PriceXOriginal PriceOriginal Quantity
(Absolute values taken)
=(42)×(520)=0.5(Ed<1,relatively inelastic demand)


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