Question

A consumer spends Rs 400 on a good priced at Rs 8 per unit. When its price rises by 25  percent, the consumer spends Rs 500 on the good. Calculate the price elasticity of demand by the Percentage method.

Answer 1

Given:
Actual Total Expenditure (TE₀) = Rs 400
Change Total Expenditure (TE₁) = Rs 500
Actual Price (P₀) = Rs 8
Percentage change in price = +25

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

`25 = (P_1 - 8)/8 xx 100`

`200/100 = P-1- 8`

`P_1 = 10`

Therefore,

Price (P)	Total Expenditure (TE) = Price (P) × Quantity (Q)	Quantity (Q) = `"TE"/P`
P0 = Rs 8	TE0 = Rs 400	Q0 = 50
P1 = Rs 10	TE1 = Rs 5	Q1= 50

herefore,

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

Ed = (-) `("Changeindemand"/"Actualdemand" xx 100)/(-25)`

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

Ed = (-) `((50 - 50)/50 xx 100)/(25)`

∴ Ed = 0

Thus, the price elasticity of demand is 0