If ratio between the change in price & change in quantity demanded is 0.25. The consumer demands 100 units at an initial price of Rs 10 per unit. Calculate the price elasticity of demand.
Answer & explanation
Correct answer: option 3
The correct answer is option (3) : (-) 0.40
Given Data:
- Ratio between the change in price and change in quantity demanded = 0.25
- Initial quantity demanded (Q₁) = 100 units
- Initial price (P₁) = Rs 10 per unit
- Formula for Price Elasticity of Demand (Ed): Ed=%ΔQ/%ΔP
Step 1: Expressing Given Ratio
The given ratio 0.25 represents:
(ΔP/P)/ (ΔQ/Q)=0.25
Since price elasticity of demand is calculated as: Ed=%ΔQ/%ΔP
Taking the reciprocal of 0.25:
Ed=1/0.25 = 0.4
Since the law of demand states that price and quantity demanded are inversely related, price elasticity is negative. So, the answer is: (-) 0.40