question_answer

A 5 per cent fall in the price of a good raises its demand from 300 units to 318 units. Calculate its price elasticity of demand.

Answer:

Given, the initial quantity \[{{Q}_{1}}=300\]

New quantity \[{{Q}_{2}}=318\]

So,       \[\Delta Q=318-300=18\]

Now, percentage fall in price \[=\frac{\Delta P}{P}\times 100=(-)\,5%\]

We know,

\[{{E}_{d}}=(-)\frac{\frac{\Delta P}{{{Q}_{1}}}\times 100}{\frac{\Delta P}{P}\times 100}=(-)\frac{\frac{18}{300}\times 100}{(-)\,5}=(-)\frac{6}{(-)\,\,5}=1.2\]

Thus, price elasticity of demand is 1.2