Question

3. A.

The disposable income of Mehta family increases from Rs 5000 to Rs 15,000. As a result,

the family‘s demand for milk and milk goods has increased from 30 liters to 60 liters per

month. Calculate the income elasticity of demand. (5 Marks)

3. B.

A drop in the price of lemons from Rs 100 per kg to Rs 60 Per Kg increases the quantity

demanded from 1.75 to 7 kg per week. Calculate the price elasticity of demand. (5 Marks)

Answer 1

3.a)  income elasticity of demand= $\%$ $change in quantity demanded\over change in icome$

percentage change of quantity demanded$=new value-old value\over old value$

percentage change of quantity demanded =$60-30\over30$ =1

percentage change in income =$15000-5000\over5000$ =2

Therefore price elasticity of demand =$1\over 2$ =0.5

=0.5

3.b) price elasticity of demand = $percentage change in quantity demanded\over percentage change in price$

percentage change in quantity demanded =$7-1.75\over 1.75$ =3

percentage change in price=$60-100\over100$ =0.4

Thus, price elasticity of demand =$0.4\over 3$

=0.1