A consumer spends rs. 100 on a good priced at rs. 4 per unit . When price falls by 50% the consumer continues to spend rs. 100 on the good. Calculate price elasticity of demand .
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Explanation:
Initial price (P)=Rs.4
Fall in price by 50 per cent =4×
100
50
=Rs.2
New price (P
1
)=Rs.4−Rs.2=Rs.2
Given, P=Rs.4;P
1
=Rs.2;△P=P
1
−P=Rs.2−Rs.4=(−)Rs.2
Q=
4
100
=25 units;Q
1
=
2
100
=50 units;△Q=Q
1
−Q=(50−25)units=25 units
Price elasticity of demand (E
d
)=(−)
Q
P
×
△P
△Q
=(−)
25
4
×
−2
25
=2
Price elasticity of demand =2.
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