The price of a good rises from Rs 20 to Rs 24. As a result, the total expenditure on the good rises from Rs 2,000 to Rs 2,160. What is the price elasticity of demand (in absolute value)?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 0.5
Expenditure is price × quantity, so the quantity at each price is expenditure ÷ price.
Given:
Price: Rs 20 → Rs 24
Expenditure: Rs 2,000 → Rs 2,160
eD = percentage change in demand ÷ percentage change in price.
\( \displaystyle q_1 = \frac{2000}{20} = 100 \)
\( \displaystyle q_2 = \frac{2160}{24} = 90 \)
\( \displaystyle \%\ \text{change in demand} = \frac{90 - 100}{100} \times 100 = -10\% \)
\( \displaystyle \%\ \text{change in price} = \frac{24 - 20}{20} \times 100 = 20\% \)
\( \displaystyle |e_D| = \frac{10}{20} = 0.5 \)
The elasticity is 0.5.
Option (1) 0.4 — this divides the 8% rise in expenditure by 20%, which mixes up expenditure with quantity.
NCERT (2026-27): “2.6 Elasticity of Demand Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes. Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price. Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. …” “2.6.3 Elasticity and Expenditure The expenditure on a good is equal to the demand for the good times its price. Often it is important to know how the expenditure on a good changes as a result of a price change. The price of a good and the demand for the good are inversely related to each other. Whether the expenditure on the good goes up or down as a result of an increase in its price depends on how responsive the demand for the good is to the price change. …” |