Suppose an Individual buys 15 units of good when its price is ₹5 per unit. What will happen to his demand when price of the good increases to ₹7 per unit and elasticity of demand for the good is 0.5?
Answer & explanation
Correct answer: option 3
The elasticity of demand is given by the formula:
Elasticity of Demand=% change in quantity demanded/% change in price
Given that the elasticity of demand (E) is 0.5, we can use this information to assess the impact of a price change on the quantity demanded.
If the price increases from ₹5 to ₹7, the percentage change in price is:
% change in price=(New Price−Old Price)/Old Price×100 =[(7-5)/5]*100
% change in price=40%
Now, using the elasticity formula:
Elasticity of Demand=% change in quantity demanded/% change in price
0.5=% change in quantity demanded/40 %
% change in quantity demanded=0.5×40%=20%
Now, if the individual originally bought 15 units, a 20% decrease in quantity demanded would mean buying 0.2×15=3 fewer Units
Therefore, the correct answer is: Reduce his demand