Question

A consumer spends Rs 100 on a good priced at Rs 4 per unit. When its price falls by 25 percent, the consumer spends Rs 75 on the good. Calculate the price elasticity of demand by the  Percentage method.

Answer 1

Given:

Actual Total Expenditure (TE₀) Rs 100

Change in Total Expenditure (TE₁) Rs 75

Actual Price (P₀) Rs 4

Percentage change in price - -25

Percentage change in price = `(P_1 - P_0)/P_0 xx 100`

`= -25 = (P_1 - 4)/4 xx 100`

`(-100)/100 = P_1 - 4`

`P_1 = 3`

Therefore,

Price (P)	Total Expenditure (TE) = Price (P) × Quantity (Q	Quantity (Q) = `"TE"/P`
P0 = Rs = 4	TE0 = Rs 100	Q0 = 2
P1 = Rs 3	TE1 = Rs 75	Q1= 25

`Ed = (-) "Percentage change in quantity demanded"/"Percentage change in price"`

`Ed = (-)  ("Changeindemand"/"Actualdemand"xx100)/-25`

Ed = (-) `((Q_1 - Q_0)/Q_0 xx 100)/-25`

`Ed = (-) ((25 - 25)/25 xx 100)/-25`

`Ed = (-) (-20)/25`

∴ Ed = 0

Thus, the price elasticity of demand is 0.