Question

6. A household spend 120 on purchase of a commodity when it price is 6 per unit. When the rises to 10 per unit his total expenditure on this commodity becomes 180.calculate price elasticity of demand by percentage change method.​

Answer 1

Therefore, the price elasticity of demand by percentage change method is -0.025.

Given the price of a first commodity (p₁) = 6 rs

the price of a second commodity (p₂) = 10 rs

Expenditure on first commodity (s₁) = 120

Expenditure on second commodity (s₂) = 180

We need to find the quantity as

120 = 6 * Q₁.              180 = 10 * Q₂

Q₁ = 120 / 6                 Q₂ = 180 / 10

Q₁ = 20                         Q₂ = 18

price elasticity of demand by percentage change method as

Eₐ = P / Q * ΔQ /ΔP

ΔQ = Q₂ - Q₁ = 18 -20 = -2

ΔP = p₂ - p₁ = 10 - 6 = 4

Eₐ = 6 / 120 * -2 / 4

Eₐ = - 0.025

Therefore, the price elasticity of demand by percentage change method is -0.025.

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