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A Consumer Spends Rs 60 on a Good Priced at Rs 5 per Unit. When Price Rises by 20 Percent, the Consumer Continues to Spend Rs 60 on the Good. Calculate the Price Elasticity of Demand by Percentage Method. - CBSE (Arts) Class 12 - Economics

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Question

A consumer spends Rs 60 on a good priced at Rs 5 per unit. When price rises by 20 percent, the consumer continues to spend Rs 60 on the good. Calculate the price elasticity of demand by percentage method.

Solution

Given that

Actual Total Expenditure (TE0) Rs 60

Final Total Expenditure (TE1) Rs 60

Actual Price (P0) Rs 5

Percentage change in price = -20%

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

`-20 = (P_1 - 5)/5 xx 100`

`- 100/100 = P_1 - 5`

`P_1 = 4`

Price (P) Total Expenditure (TE) = Price (P) × Quantity (Q) Quantity (Q) = `"TE"/P``
P0 = Rs 5 TE0 = Rs 60 Q0 = 1
P1 = Rs 4 TE1 = Rs 60 Q1= 15

Therefore,

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

Ed = (-) `("Changeindemand"/"Actualdemand" xx 100)/(-20)`

Ed = `((Q_1 -Q_0)/Q_0 xx 100)/(-20)`

Ed = (-) `((15 - 12)/12 xx 100)/(-20)`

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

∴ Ed 1.25

Thus, the price elasticity of demand is 1.25

 

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Solution A Consumer Spends Rs 60 on a Good Priced at Rs 5 per Unit. When Price Rises by 20 Percent, the Consumer Continues to Spend Rs 60 on the Good. Calculate the Price Elasticity of Demand by Percentage Method. Concept: Elasticity of Demand.
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