CA Foundation · Business Economics · Theory of Demand and Supply
The price of a packet of biscuits rises from ₹20 to ₹25 and the quantity demanded falls from 500 packets to 400 packets. Using the simple percentage method, the price elasticity of demand is:
Price elasticity of demand is 0.8. Quantity falls by 20 percent (100 out of 500) while price rises by 25 percent (5 out of 20), so the ratio of 20 to 25 gives 0.8, which indicates relatively inelastic demand.
- A0.8Correct
- B1.25
- C1.0
- D0.2
Explanation
Percentage change in quantity = (100/500)×100 = 20%. Percentage change in price = (5/20)×100 = 25%. Elasticity = 20/25 = 0.8, so demand is inelastic. The value 1.25 results from inverting the ratio, and 0.2 results from using only the quantity change as a fraction.
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