A consumer spends Rs.1000 on a good price at Rs.8 per unit. When price rises by 25 percent, the consumer continues to spend same amount on the good. C

Question

A consumer spends Rs.1000 on a good price at Rs.8 per unit. When price rises by 25 percent, the consumer continues to spend same amount on the good. C

A consumer spends Rs.1000 on a good price at Rs.8 per unit. When price rises by 25 percent, the consumer continues to spend same amount on the good. Calculate price elasticity of demand by percentage method.

Monjur Alahi

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2025-01-04 04:42

1 Answers

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Salim Ahmed Kawsar · Accepted Answer · 2023-02-05T15:29:48+06:00

Given : Initial Total Expenditure `(TE_(0))`=Rs.1000
Final Total Expenditure `(TE_(1))`=Rs.1000
Initial Price `(P_(0))`=Rs.8
Percentage change in price = +25%
Percentage change in price = `(P_(1)-P_(0))/(P_(0))xx100`
`25=(P_(1)-8)/(8)xx100`
`(200)/(100)=P_(1)-8`
`P_(1)=10`
`{:("Price (P)","Total Expenditure (TE)=Price (P)"xx "Quantity (Q)","Quantity (Q)"=(TE)/(P)),(P_(0)=Rs.8,TE_(0)=Rs.1000,Q_(0)=125),(P_(1)=Rs.10,TE_(1)=Rs.1000,Q_(1)=100):}`
Now,
`E_(d)=(-)("Percentage change in quantity demanded")/("Percentage change in price")`
`E_(d)=(-)((100-125)/(125)xx100)/(25)`
`E_(d)=(-20)/(25)`
`therefore E_(d)=0.8`
Thus, the price elasticity of demand is 0.8