Question

Price of the commodity increases from $Rs.10$ to $Rs.12$ per unit and expenditure on the commodity increases by $20$ per cent. Find elasticity of demand. Give a logical support to your answer.

Answer 1

(Using percentage method):
Given that initial price $=Rs.10$, new price $=Rs.12$, and increase in expenditure $=20$ per cent, let us assume that initial quantity $=100$. Accordingly, initial expenditure $=10\times 100=Rs.1,000$, new expenditure $=1,000+20\%$ of $1,000=Rs.1,200$. New quantity $=\frac{1,200}{12}=100$. Thus, quantity demanded remains constant, even when price rises from $Rs.10$ to $Rs.12$ (or by $20\%$). Implying that elasticity of demand $=0$.