CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics
A mobile phone retailer in Pune sells 1,000 handsets a month at an average price of ₹10,000. After a 5% price cut, sales rise to 1,100 handsets. What is the price elasticity of demand (absolute value)?
The price elasticity of demand is 2.0. Sales rise from 1,000 to 1,100, a 10 percent increase, in response to a 5 percent price cut. Dividing 10 by 5 gives 2, so demand is elastic, meaning quantity responds more than proportionately to price.
- A0.5
- B1.0
- C2.0Correct
- D5.0
Explanation
Percentage change in quantity = (100/1,000) × 100 = 10%. Percentage change in price = 5%. Elasticity = 10/5 = 2. Demand is elastic. The value 0.5 results from inverting the ratio.
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