• # question_answer A consumer spends Rs. 400 on a good priced at Rs. 8 per unit. When its price rises by 25 percent, the consumer spends Rs. 500 on the good. Calculate the price elasticity of demand by the Percentage method.

 Given Initial Total Expenditure$T{{E}_{0}}$ = Rs. 400 Final Total Expenditure$T{{E}_{1}}$ = Rs. 500 Initial Price ${{P}_{0}}$ = Rs. 8 Percentage change in price = + 25 Percentage change in price = $\frac{{{P}_{1}}-{{P}_{0}}}{{{P}_{0}}}\,\,\times \,\,100$ $25=\frac{{{P}_{1}}-8}{8}\,\,\times \,\,100$ $\frac{200}{100}={{P}_{1}}-8$ ${{P}_{1}}=10$ Price (P) Total Expenditure Te = Price P $\times$ Quantity Q Quantity Q = TEP ${{P}_{o}}=Rs\,\,8$ $T{{E}_{0}}=\,\,Rs\,\,400$ ${{Q}_{0}}=50$ ${{P}_{1}}=\,\,Rs\,\,10$ $T{{E}_{1}}=\,\,Rs\,\,500$ ${{Q}_{1}}=50$ Now $\text{Ed = }\frac{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{quantity}\,\,\text{demanded}}{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{price}}$ Percentage change in Quantity =  $\frac{{{Q}_{1}}-{{Q}_{0}}}{{{Q}_{0}}}\,\times \,\,100$ $=\frac{50-50}{50}\,\,\times \,\,100$ $\text{Ed = }\frac{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{quantity}\,\,\text{demanded}}{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{price}}$ $=\frac{0}{25}$ Ed = 0 Thus, the price elasticity of demand is 0.