Question

Solve the following problems on Price elasticity of demand and classify the nature of elasticity and good. 1) The demand for a CDs is 1000 units and the price is Rs. 20/- per CD. Later on the price rises to Rs.22/- per CD as result the demand falls to 870 units

Answer 1

1.). Price elasticity of demand (PED) $=\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; price}$

PED = $=\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \div \frac{P_{2} -P_{1}}{(P_{2}+P_{1})/2 }$

Where: Q₁ = 1000 P₁ = 20

Q₂ = 870 P₂ = 22

PED = $\frac{870 -1000}{(870+1000)/2 } \div\frac{22 -20}{(22+20)/2 }$

= $\frac{-130}{935} \div\frac{2}{21} = \frac{-0.139}{0.095} = -1.46$

PED = 1.46

The good is price elastic since PED is greater than 1, indicating that the quantity demanded is highly responsive to price variations. The good is ordinary good.