Question

Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity .

Solution

eD equals fraction numerator increment straight q over denominator increment straight p end fraction cross times straight p over straight q equals fraction numerator 5 left parenthesis equals 20 minus 25 over denominator 1 left parenthesis equals 5 minus 4 right parenthesis end fraction cross times 4 over 25 equals 5 over 1 cross times 4 over 25 equals 4 over 5 equals 0.8

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