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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. - Economics

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.

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Solution

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

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