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Question

The price elasticity of demand of a good is ()0.5. At a price of Rs 20 per unit its demand is 300 units. At what price will its demand increase by 10 percent ?

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Solution

We have,

eD=()0.5

P1=20

P2=?

Q1=300

We know that,

ΔQ=Q2Q1

ΔQ=330300

ΔQ=30

Now,

Q2=10

Q2=330

So,

$ {{e} D =} \ dfrac {\ Delta P} {\ Delta Q}. \ dfrac {P} {Q} $

()0.5=30ΔP×20300

()0.5×300×ΔP=600

150ΔP=600

ΔP=600150

ΔP=4

So, new price will be P+ΔP

204=Rs.16

Hence, this is the answer.

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