Question

Measure Price Elasticity of Demand if 20% fall in price results in 25% increase in demand.

Answer 1

The Price Elasticity of Demand (PED) can be calculated using the following formula:

`E_d = (% "Change in Quantity Demanded")/(%"Change in Price")`

Given: 

1. Percentage change in price (ΔP) = −20% (fall in price)
2. Percentage change in quantity demanded (ΔQ) = +25% (increase in demand)

Calculation:

`E_d = (+25%)/(-20%)`

`E_d = -1.25`

The absolute value of the elasticity is 1.25 (ignoring the negative sign, which only represents the inverse relationship between price and demand).

This means that demand is elastic because the value is greater than one, showing that the quantity demanded is relatively responsive to price variations.