What will be elasticity of demand of a commodity when its price rises by 20% and quantity demanded falls from 125 units to 75 units?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → $e_d=2$
$e_d$= Percentage change in quantity demanded / Percentage change in Price
Step 1: Calculate percentage change in quantity demanded
Initial quantity = 125 units
New quantity = 75 units
Change in quantity = 75 - 125 = -50 units
Percentage change in quantity= [(-50)/125] * 100 = - 40%
Step 2: Percentage change in price = +20% (given)
$e_d$= -40 % / 20% = -2
Since elasticity of demand is usually expressed as an absolute value, we get: $e_d$= 2