Question

3.a. A business firms sells a good at the price of Rs 450.The firm has decided to reduce the
price of good to Rs 350.Consequently, the quantity demanded for the good rose from
25,000 units to 35,000 units. Calculate the price elasticity of demand. (5 Marks)
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Answer 1

Answer:

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Explanation:

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Answer 2

Answer:

Explanation:

• Price elasticity of demand is the magnitude of a change in goods wanted with the price change. If the change is extreme from the original point, it is termed as being elastic.

• At the same time, if there is a little change in the association between purchases and price change, it is referred to as being inelastic.

• To solve this problem, we will use the arc elasticity. Arc elasticity employs a midpoint between the two points of a curve to quantify the elasticity of a commodity.

• First, we calculate the two midpoints:

            $Midpoint Quantity(Q)=(Q1+Q2)/2$

                                            $Q=(25000+35000)/2$

                                                $=30000$

           $Midpoint Price(P)=(P1+P2)/2$

                                     $P=(450+350)/2$

                                         $=400$

• Now, we calculate the PED,

         $PED= \frac{Q2-Q1}{MidpointQ}/\frac{P2-P1}{MidpointP}$

                   $=\frac{35000-25000}{30000}/\frac{350-450}{400}$

                   $=0.33/-0.25$

                   $= -1.32$

Hence, the Price Elasticity of Demand is -1.32.