question_answer

The price elasticity of demand for a good is\[\mathbf{0}.\mathbf{4}\]. If its price increase by 5 per cent, by what percentage will its demand fall? Calculate.

Answer:

\[{{E}_{P}}=\frac{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{quantity}\,\,\text{demanded}}{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{price}}\]

\[-\,0.4=\frac{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{quantity}\,\,\text{demanded}}{\text{5}}\]

\[2\] = Percentage change in quantity demanded

\[\therefore \]      Quantity decreases by 2% or Demand falls by 2%