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Question
When the price of good rise from Rs 10 per unit to Rs 12 per unit, its quantity demanded falls by 20 percent. Calculate its price elasticity of demand. How much would be the percentage change in its quantity demanded, if the price rises from Rs 10 per unit to Rs 13 per unit?
Solution
Initial Price (P0) = Rs 10
Final Price (P1) = Rs 12
Percentage change in quantity demanded = -20
`Ed = -"Percentage Change in Quantity Demanded"/"Percentage Change in Price"`
`Ed = (-20)/((P_1-P_0)/(P_0) xx 100)`
`Ed = (+20)/((12-10)/10 xx 100)`
∴ Ed = 1
Now, `P_0 = Rs 10 " and" P_1 = Rs 13`
`1 = "Percentage Change in Demand"/((13-10)/10 xx 100)`
∴ Percentage Change in Demand = - 30
Hence, demand falls by 30% when price rises from Rs 10 to Rs 13 per unit.
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