Question : The quantity demanded of a good increases from 500 units to 600 units when the price decreases from INR 10 to INR 8 per unit. Calculate the price elasticity of demand.
Option 1: 0.6
Option 2: 1.0
Option 3: 1.2
Option 4: 2.0
Correct Answer: 1.0
Solution : The correct answer is (b) 1.0
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
= [(600 - 500) / 500] * 100
= 20%
Next, let's calculate the percentage change in price:
Percentage Change in Price = [(New Price - Initial Price) / Initial Price] * 100
= [(8 - 10) / 10] * 100
= -20%
Now, we can substitute these values into the formula:
Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
= 20% / -20%
= -1
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 1.
Based on the provided options, the most appropriate answer is: 1.0
This is the closest option to the calculated price elasticity of demand of 1.
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