Solved Questions- Percentage Method of Price Elasticity of Demand

 

1. Price of commodity increases from ₹50 to ₹60 per unit. Quantity demand initially was 2000 units what should be the new quantity so that elasticity of demand is established to be unitary?

Solution:

 The following information is given:

 

Q = 200 units

 

Q1=?

*ΔQ =Q1-Q

 

 

P = ₹ 50

 

P1= ₹60

ΔP = P1-P

=60-50

= 10

 

Ed=1

 



Interpretation:

In order to get unitary elasticity of demand, new quantity should be 160 units.

Note: We have used a negative sign in the quantity demanded (40) because it is decreased by 40 units.


2. Consider the demand for a good. At price ₹4, the demand for the good is 25 units. Suppose the price of the good increases to ₹5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Solution:

 The following information is given:

 

Q = 25 units

 

Q1=20 units

ΔQ =Q1-Q

= 20-25

= -5

 

P = ₹ 4

 

P1= ₹5

ΔP = P1-P

=5-4

= 1

       

Ed=?









Note:  Please ignore the (-) sign of the calculated value of Elasticity of demand . It signifies an inverse relationship between price and quantity demand.

Interpretation:

The above calculation shows that the elasticity of demand is 0.8. Therefore, demand is inelastic since it is less than 1.

3. Yesterday, the price of facemasks was ₹3 a box, and kavi was willing to buy 10 boxes. Today, the price has gone up to ₹3.75 a box, and kavi is now willing to buy 8 boxes. Is Kavi's demand for facemasks elastic or inelastic? What is kavi's elasticity of demand?

Solution:

The following information is given:

 

Q = 10 boxes

 

Q1=8

boxes

 ΔQ =Q1-Q

       = 8-10

       = -2

% change in Q.D

= ΔQ/Q×100

= -2/10×100

=  -20%

 

P = ₹ 3

 

P1= ₹3.75

ΔP = P1-P

     =3.75-3

     = 0.75

% change in price

=  ΔP/P×100

= 0.75/3×100

=  25%

 

Ed=?

 



Note:  Please ignore the (-) sign of calculated value of Elasticity of demand as it signifies an inverse relationship between price and quantity demand.

Interpretation:

The above calculation shows that the elasticity of demand is 0.8. Therefore, demand is inelastic since it is less than 1

4. If Ravi's elasticity of demand for Pizza is constantly 0.9, and he buys 4 Pizzas when the price is ₹1.50 per pizza, how many will he buy when the price is ₹1.00 per Pizza?

Solution:

 The following information is given:

 

Q = 4 units

 

Q1=?

 ΔQ =Q1-Q

     

 

 

P = ₹ 1.50

 

P1= ₹1.00

ΔP = P1-P

     =1.00-1.50

     = -0.50

       

Ed=0.9

 




Interpretation:

Since Ravi probably can't buy fractions of pizzas, it seems like he will buy 5 Pizzas when the price goes down to ₹1.00 per pizza.

5. Malvika advertises to sell bananas for ₹4 a dozen. She sells 50 dozen and decides that she can charge more. She raises the price to ₹6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity of demand is constant, how many would she sell if the price were ₹10 a dozen?

Solution:

 The following information is given:

 

Q =50 dozen

 

Q1=60 dozen

 ΔQ =Q1-Q

       =40-50

       = -10

 

P = ₹ 4

 

P1= ₹6

ΔP = P1-P

      = 6-4

       = 2

       

Ed=?


Note:  Please ignore the (-) sign of calculated value of Elasticity of demand as it signifies an inverse relationship between price and quantity demand.

Interpretation:

Her elasticity of demand is the absolute value of -0.4 or 0.4. Malvika's elasticity of demand is inelastic since it is less than 1.


  Percentage Change in Q.D = 150×0.4 = 60 %. It indicates quantity demand has fallen by  60%.

To find the value of Q1, Let’s put the value of  % change in Quantity Demand and Q in the formula mentioned below:

 % Change in Q.D = Q1-Q /Q ×100

-60 = Q1-50 /50 ×100

-60    = (Q1-50) 2

-60 = (2Q1-100)

 2Q1 =100-60

 2Q1 =40

  Q1 =20

The new demand at ₹10 a dozen will be 20 dozen bananas.


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