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Question
A 5 percent fall in the price of a good raises its demand from 300 units to 318 units. Calculate its price elasticity of demand.
Solution
Given, the initial quantity Q1 = 300
New quantity Q2 = 318
So, ΔQ = 310 - 300 = 18
Now, percentage fall in price =`(ΔP)/Pxx100` = (-)5%
We know,
`E_d=(-)((ΔQ)/Qxx100)/((ΔP)/Pxx100)=(-)(18/300xx100)/((-)5)=(-) 6/((-)5)=1.2`
Thus, price elasticity of demand is 1.2
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