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Question
When price of good is Rs7 per unit a consumer buys 12 units. When price falls to Rs6 per unit he spends Rs72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.
Solution
| Quantity (Q) |
Price (P) |
Total Expenditure (TE) |
| 12 | Rs7 | |
| 12 | Rs6 | 72 |
Given that
PricexQuantity=Total expenditure
6 x Quantity=12
or, Quantity=12
`E_d="Percentage change in quantity"/"Percentage change in price"`
Percentage change in quantity`=(DeltaQ)/Qxx100=(12-12)/12xx100=0`
Percentage change in price`(DeltaP)/Pxx100=(6-7)/7xx100=14.28`
By substituting the values in the formula of price elasticity of demand,weget
`E_d=0/14.28=0`
Thus, the demand is perfectly inelastic, then the demand curve is a vertical straight line parallel to the price-axis.
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