Question

A consumer buys 40 units of a good at a price of 5 per unit.Suppose the price elasticity of demand is (-)2.At what price will he buy 32 units

Answer 1

Answer: 5.5

Explanation:

A consumer bought 40 units of good at a price of 5 per unit, so,

Quantity, Q = 40 units and Price, P = 5 per unit

The price elasticity of demand, eD = (-) 2

We are asked to find the price “P1” required to buy a quantity “Q1” = 32 units of good.

∴ The change in quantity, ∆Q = Q1 – Q = 32 - 40 = - 8 units

The formula for the elasticity of demand is given as,

eD = [∆Q/∆P] * [P/Q]

⇒ - 2 = [-8/∆P] * [5/40]

⇒ ∆P = [8 * 5]/[2 * 40] = ½

⇒ ∆P = 0.5

Thus,

The price “P1” required for buying 32 units is given as,

= P + ∆P

= 5 + 0.5

= 5.5

Answer 2

Solution

As we know elasticity of demand:

ED = (∆Q/∆P) * [P/Q]

∆P = (∆Q*P)/ (ED*Q)

∆P = (8 * 5) /(2 * 40)

∆P = 1/2

∆P = 0.5

Change in Price is 0.5, it's means Price of quantity increases from 5 to 5.5, price of 32 units will be 5.5 per unit.