Question

There are two goods A and B. The prices of both rise by 7 percent. As a result, demand for A falls by 10.5 percent, while there is no change in demand for B. Find out and comment on the elasticity of A and B.

Answer 1

Answer:

ANSWER

We are given,

Percentage fall in demand =20

Initial Price =10

New Price =12

% Increase in Price =

10

2

×100=20%

We know,

e

d

=−

%change in price

%change in Demand

=−

20

20

=−1

Now, if price rises from 10 to 13

% Change in price −

10

3

×100=30%

So,

% Change in Demand =% change in Price ×e

d

=30×−1=−30

So, we can say that if the price rises from Rs. 10 to Rs. 13, i.e by 30%, then the demand will fall by 30%. This is because the good follows unitary elasticity.