Question 16 Marks
Answer the following questions
(i) If a product price increases, a family's spending on the product has to increase. Defend or refute.
(ii) The demand for a good double due to 25% fall in its price. Calculate its price elasticity of demand
(i) If a product price increases, a family's spending on the product has to increase. Defend or refute.
(ii) The demand for a good double due to 25% fall in its price. Calculate its price elasticity of demand
Answer
View full question & answer→(i) When a product price increases, expenditure on the commodity will not increase in the situation when $E _{ d }>1$ (elasticity of demand is greater than unity). It will increase only in situation when $E _{ d }<1$. In a situation when $E _{ d }=1$, expenditure will remain constant, even when prices rise.
(ii) Percent Change in price $=25$ Percent
Let the demand be x
Demand after fall in price 2 x
Percent Change in Demand $=\frac{\text { Change in Demanded }}{\text { Old Demand }} \times 100$
$=\frac{2 x-x}{x} \times 100=\frac{x}{x} \times 100=100 \%$
Elasticity of Demand:
$\begin{array}{l}\left(E_d\right)=(-) \frac{\text { Percentage Change in quantity demanded }}{\text { Percentage Change in price }} \\ =(-) \frac{100}{25}=(-) 4 \\ \text { So, } E_d=(-) 4\end{array}$
(ii) Percent Change in price $=25$ Percent
Let the demand be x
Demand after fall in price 2 x
Percent Change in Demand $=\frac{\text { Change in Demanded }}{\text { Old Demand }} \times 100$
$=\frac{2 x-x}{x} \times 100=\frac{x}{x} \times 100=100 \%$
Elasticity of Demand:
$\begin{array}{l}\left(E_d\right)=(-) \frac{\text { Percentage Change in quantity demanded }}{\text { Percentage Change in price }} \\ =(-) \frac{100}{25}=(-) 4 \\ \text { So, } E_d=(-) 4\end{array}$