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CA Foundation · Business Economics · Theory of Demand and Supply

The monthly income of a household in Pune rises from ₹40,000 to ₹50,000, and its monthly purchases of branded edible oil rise from 8 litres to 9 litres. Using the percentage (simple) method, the income elasticity of demand for branded edible oil is:

Income elasticity is the percentage change in quantity demanded divided by the percentage change in income. Quantity rises 12.5% (8 to 9 litres) and income rises 25% (₹40,000 to ₹50,000), so elasticity is 12.5/25 = 0.5, meaning oil is a normal necessity-type good.

  1. A0.50Correct
  2. B0.45
  3. C2.00
  4. D0.80

Explanation

Percentage change in quantity = (1/8) × 100 = 12.5%. Percentage change in income = (10,000/40,000) × 100 = 25%. Elasticity = 12.5/25 = 0.5. Using the new values as base (1/9 divided by 1/5 = 0.56) would be wrong, and 2.00 comes from inverting the ratio.

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