A consumer spends Rs. 80 on purchasing a commodity when its price is Re. 1 per unit and spends Rs. 96 when the price is Rs. 2 per unit. Calculate the price elasticity of demand.

- a)0.2
- b)0.3
- c)0.4
- d)0.5

Correct answer is option 'C'. Can you explain this answer?

Related Test: Test: Theory Of Demand- 3

By
Dhanush Surya
·
Sep 24, 2018 ·CA Foundation

4 Answers

Chandna Arora
answered
Jun 05, 2018

Initial Total Expenditure (TEo)=Rs 80

Final Total Expenditure (TE1)=Rs 96

Initial Price (Po)=Rs 1

Final Price (P1)=Rs 2

Now, Quantity Q = TE/P

Qo = 80/1 = 80

Q1 = 96/2 = 48

Now,

Ed=(âˆ’)[Po/Qo] x [Î”Q/Î”P]

Ed=(âˆ’)1/80 x [48âˆ’80]/(2âˆ’1)

Ed=(âˆ’)1/80 x (âˆ’32/1)

Ed=(âˆ’)âˆ’0.4

Ed=0.4

Thus, the price elasticity of demand is 0.4.

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