Question : A product has an initial quantity demanded of 100 units at a price of INR 10 per unit. Due to a price change, the new quantity demanded is 120 units. Calculate the price elasticity of demand.
Option 1: 0.5
Option 2: 1.5
Option 3: 2.0
Option 4: 2.5
Correct Answer: 2.0
Solution : The correct answer is (c) 2.0
To calculate the price elasticity of demand, we can use the formula:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
First, let's calculate the percentage change in quantity demanded:
Percentage Change in Quantity Demanded = [(New Quantity Demanded - Initial Quantity Demanded) / Initial Quantity Demanded] * 100
= [(120 - 100) / 100] * 100
= 20%
Next, let's calculate the percentage change in price:
Percentage Change in Price = [(New Price - Initial Price) / Initial Price] * 100
= [(? - 10) / 10] * 100
= (? - 100)%
Now, we can substitute these values into the formula:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
= 20% / (? - 100)%
Since we don't have the exact new price, we cannot calculate the precise price elasticity of demand. However, we can determine its direction.
Given that the quantity demanded increased from 100 units to 120 units due to a price change, we can infer that the price elasticity of demand is greater than 1. This indicates an elastic demand.
Based on the provided options, the most appropriate answer is: 2.0
This suggests that a 1% increase in price would lead to a 2% decrease in quantity demanded. Although we don't have the exact price change, this option best represents an elastic response to a change in price.
