A consumer spends rs. 400 on a good priced at rs. 4 per unit. When the price rises by 25 percent the consumer continues to spend rs. 400 calculate the price elasticity of demand of demand by percentage method
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Answer:
Given:
Initial Total Expenditure (TE
0
)=Rs.400
Final Total Expenditure (TE
1
)=Rs.400
Initial Price (P
0
)=Rs.4
Percentage change in price =+25
Percentage change in price =
P
0
P
1
−P
0
×100
25=
4
P
1
−4
×100
100
100
=P
1
−4
P
1
=5
Price (P) Total Expenditure (TE)= Price (P) × Quantity (Q) Quantity (Q)=
P
TE
P
0
=Rs.4 TE
0
=Rs.400 Q
0
=100
P
1
=Rs.1 TE
1
=Rs.400 Q
1
=80
Now,
E
d
=(−)
Percentage change in price
Percentage change in quantity demanded
E
d
=(−)
25
Q
0
Q
1
−Q
0
×100
E
d
=(−)
25
100
80−100
×100
E
d
=(−)
25
−20
E
d
=0.8
∴
E
d
=0.8
Thus, the price eleasicity of demand is 0.8
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