Question

When the price of potato chips falls from ₹ 40 to ₹ 20 per unit, its demand increases by 20 units. If the price elasticity of demand is (−) 0·5, calculate the quantity demanded of potato chips at ₹ 20.

Answer 1

Given:

E_d = 0.5

P₁ = 40, [P₂ = 20]

Q₂ − Q₁ = 20

`E_d = (%triangleQ)/(%triangleP)`

Rearranging to find the initial quantity (Q₁):

%∆Q = Ed × %∆P

`(Q_2 - Q_1)/Q_1 = E_d xx (P_2-P_1)/P_1`

Now, solving for Q₁:

`20/Q_1 = -0.5 xx (20-40)/40`

`20/Q_1 = -0.5 xx ((-20)/40)`

`20/Q_1 = -0.5 xx (-0.5)`

`20/Q_1 = 0.25`

`Q_1 = 20/0.25`

= 80

Thus, the quantity demanded at P₂ = 20 is:

Q₂ = Q₁ + 20

= 80 + 20

= 100