Question : The quantity demanded of a good decreases from 400 units to 300 units when the price increases from INR 20 to INR 30 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: -1.0
Solution : The correct answer is (b) -1.0.
Percentage change in quantity demanded = (300 - 400) / 400 * 100% = -25%
Percentage change in price = (30 - 20) / 20 * 100% = 50%
Price elasticity of demand = -25 / 50 = -1.0
A price elasticity of demand of -1.0 means that a 1% increase in price leads to a 1% decrease in quantity demanded. In this case, a 50% increase in price leads to a 25% decrease in quantity demanded. This suggests that demand for this good is relatively elastic, meaning that consumers are sensitive to changes in price.
