New Problems Based on Price elasticity of Demand

-
 Hi Learner,

Thanks for writing your query!

Please find the solved answers of your questions. We are always happy to help the true learners.  Pls. Let us know if we can help you further!

Sending wishes to you ðŸ˜Š
Work hard.... Work Better.... 
Keep learning.... Keep Improving....


Questions for Practice:

1. Suppose the price of a commodity falls from ₹6 to ₹4 per unit and due to this quantity demanded of the commodity increases from 80 units to 120 units. Find out the price elasticity of demand

Solution:

Following information is given:

 

Q = 80 units

 

Q1= 120 units

 Î”Q =Q1-Q

      =120-80

      = 40

 

P = ₹6

 

P1= ₹4

ΔP = P1-P

     = 4-6

     = -2

       

                                     Ed=?

 










Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive.

Interpretation:

The calculated value of Elasticity of demand(Ed) is 1.5>1 indicates elastic demand or more than unitary elastic demand. It implies that 10% fall in price of the commodity caused 15% increase in its demand showing that change in demand is greater than change in price of the commodity.

2.  A consumer purchases 80 units of a commodity when its price is ₹ 1 per unit and he purchases 48 units when its price rises to₹ 2 per unit. What is the price elasticity of demand for the commodity?

Solution:

Following information is given:

 

Q = 80 units

 

Q1= 48 units

 Î”Q =Q1-Q

      = 48-80

      = -32

 

P = ₹ 1

 

P1= ₹2

ΔP = P1-P

     = 2-1

     = 1

       

                                     Ed=?

 








Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to be positive.


Interpretation:

The above calculated value of Elasticity of demand(Ed) is 0.4 < 1 indicates inelastic demand or less than unitary elastic demand. It implies that 10% rise in price of the commodity caused 4 % fall in its demand showing that change in demand is less than change in price.


3. Suppose that the price elasticity of demand for petrol is equal to unity and at ₹15 per litre an individual consumes (i.e. demands) 80 litres of petrol in a weak. How much price of petrol should be fixed so that he demands 60 litres of petrol.

Solution:

Following information is given:

 

Q = 80 lts.

 

Q1= 60 lts.

 Î”Q =Q1-Q

      =60-80

      = -20

 

P = ₹ 15

 

P1=?

ΔP = P1-P

 Î”P  = P1-15…….(1)

    

       

                                     Ed=1
















Note:  (-) negative sign will not be prefixed to the formula as the given value of elasticity is positive.

Interpretation:

In order to get unitary elasticity, new price should be ₹11.25


Comments

Post a Comment

Popular posts from this blog

SHIFTS & ROTATIONS IN PRODUCTION POSSIBILITY CURVE

-
Image
    Learning Contents:                                                                Shifts   in   PPC  Rotations in PPC Change in Production Possibility Curve (Shifting/Rotation) The change in the Production Possibility curve can be of two types:  Shift in PPC: PPC will shift when there is a change in productive capacity (resources or technology) with respect to both the goods. Rotation of PPC: PPC will rotate when there is a change in productive capacity (resources or technology) with respect to only one good. Shifts in PPC:   The shift in PPC can either be rightward or backward. These shifts bring about a change in the production of both goods in an economy. The shifts in PPC are of two types: Rightward shift in PPC: Rightward shift in PPC occurs when the resources are increased or technology is improved for the production of both goods that means we can produce more of both the goods. Accordingly, PPC shifts to the right from Initial PPC (AB) to Final PPC (CD).   Re
Read more »500

Income Elasticity: Luxury Goods, Necessity Goods, and Inferior Goods.

-
Image
  Learning Contents:                                                               ·         Understanding Income Elasticity with respect of luxury goods, necessity goods and inferior goods. The demand for a commodity not only depends on the price of a commodity but also the income level of the consumer. It is a general understanding that a consumer usually prefers to spend more when his income rises and less when his income falls. Sometimes, we might also experience a fall in the demand of certain goods and services even when income rises. Therefore, income elasticity varies with respect to different types of goods and services. The income elasticity measures the percentage change in quantity demanded as a result of percentage change in the income of the consumer. The formula of income elasticity of demand is, The income elasticity measures the demand’s sensitivity or responsiveness to the change in income.   In simple words, it measures to what extent demand changes as a result o
Read more »500

CONSUMER’S PREFERENCES AND INDIFFERENCE MAP

-
Image
    Learning Contents:                                                               ·          Understanding Consumer preferences and Indifference curve. ·          Understanding Indifference Map. Introduction: The concept of the indifference map is based upon the concept of consumer preferences. So, it is important to first understand the concept of consumer preferences. Consumer’s Preferences: Preferences indicate individual tastes, likings, etc. that determine the amount of pleasure, happiness people get from the consumption of the goods and services and measured by the utility of various bundles or combinations of goods. It allows the consumers to rank these bundles of goods according to the levels of utility it provides them. Note that preferences are independent of income and prices. The ability to purchase goods does not determine a consumer’s likes or dislikes. One can have a preference for Rolex watches over Titan but only have the financial means to wear a titan
Read more »500