Question

A consumer spends 2000 on a good priced 8 per unit. When price rises by 25% , the consumer continues to spend the same amount on the good. Calculate price elasticity of demand by the percentage method​

Answer 1

Answer: Price Elastity of demand = 0.8

Explanation:

Quantity purchased at price 8 per unit(Q) = $\frac{2000}{8}$

                                              = 250 units

When price rises by 25%, it will become 10 per unit

Quantity purchased at price 10 per unit(Q1) = $\frac{2000}{10}$

                                              = 200 units

Change in Quantity(ΔQ) = Q - Q1

                                 = 250 - 200

                                 = 50 units

Price elasticity of demand = %change in quantity/ %change in prices

                                            = $\frac{(\frac{DeltaQ}{Q})*100 }{25}$

                                            =  $\frac{(\frac{50}{250})*100 }{25}$

                                            = $\frac{20}{25}$

                                            = 0.8