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Question
Suppose there was a 4% decrease in the price of a good, and as a result, the expenditure on the good increased by 2%. What can you say about the elasticity of demand ?
Solution
Percentage decrease in price = 4%
Increase in expenditure = 2%
ΔE= ΔP {q + (1 + ed)}
Since the price has decreased, the expenditure on the good will increase. This implies that the percentage of change in demand has increased more than the percentage decrease in price.
Thus, elasticity = `( "Percentage change in demand ")/("Percentage change in price ")`
The numerator is more than the denominator. This means that elasticity is more than 1. We can say that the small change in price has lead to a bigger change in demand, and as a result, the demand is elastic.
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