Question : The quantity demanded of a good decreases from 200 units to 160 units when the price increases from INR 20 to INR 25 per unit. Calculate the price elasticity of demand.
Option 1: 0.5
Option 2: 1.0
Option 3: 1.5
Option 4: 2.0
Correct Answer: 1.5
Solution : The correct answer is (c) 1.5
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
= [(160 - 200) / 200] * 100
= -20%
Next, let's calculate the percentage change in price:
Percentage Change in Price = [(New Price - Initial Price) / Initial Price] * 100
= [(25 - 20) / 20] * 100
= 25%
Now, we can substitute these values into the formula:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
= -20% / 25%
= -0.8
The price elasticity of demand is calculated as a negative value, but for simplicity, we usually take the absolute value. Therefore, the price elasticity of demand in this case is 0.8.
Based on the provided options, the closest option to the calculated price elasticity of demand of 0.8 is: 1.5
