Answer to Question #146767 in Macroeconomics for tanmayee

Question

a business firm sells good at price of RS 450.The firm has decided to reduce the price of good to rs 350.consequently, the quantity demanded for the good roes from 25000 units to 35,000 units. calculate the price elasticity of demand.

Answer 1

P₁ = 450

P₂ = 350

Q₁ = 25000

Q₂ = 35000

Percentage change in quantity $= \frac{Q_2 – Q_1}{\frac{Q_2 + Q_1}{2}} \times 100$

Percentage change in quantity $= \frac{35000 – 25000}{\frac{35000 + 25000}{2}} \times 100 = \frac{100}{3}$

Percentage change in price $= \frac{P_2 – P_1}{\frac{P_2 + P_1}{2}} \times 100$

Percentage change in price $= \frac{350 – 450}{\frac{350 + 450}{2}} \times 100 = \frac{100}{4}$

$Price elasticity of demand = \frac{Percentage \;change \;in\; quantity}{Percentage\; change\; in\; price}$

$Price elasticity of demand = \frac{100}{3} \times \frac{4}{100} = \frac{4}{3} = 1.333$

The price elasticity of demand is 1.333.