When price of a good falls from ₹ 20 per unit to ₹ 15 per unit, its demand rises by 25 percent. Calculate price elasticity of demand (by percentage method).

Question

Accepted Answer

To calculate the price elasticity of demand using the percentage method, we use the formula:

$$ \text{Price Elasticity of Demand (PED)} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} $$

Given:
- The price of the good falls from ₹ 20 to ₹ 15.
- The demand rises by 25%.

First, calculate the percentage change in price:

$$ \text{Percentage Change in Price} = \frac{\text{Old Price} - \text{New Price}}{\text{Old Price}} \times 100 $$

$$ = \frac{20 - 15}{20} \times 100 $$

$$ = \frac{5}{20} \times 100 $$

$$ = 25\% $$

Now, calculate the price elasticity of demand:

$$ \text{PED} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} $$

$$ = \frac{25\%}{25\%} $$

$$ = 1 $$

Thus, the price elasticity of demand is 1, which corresponds to Option 2.

### Explanation for Why Option 2 is Correct:

Option 2 is correct because the calculated price elasticity of demand is exactly 1. This indicates unitary elasticity, meaning the percentage change in quantity demanded is equal to the percentage change in price.

### Explanation for Why Other Options are Incorrect:

1. **Option 1 (0.88):** This option suggests that the demand is inelastic, meaning the percentage change in quantity demanded is less than the percentage change in price. However, our calculation shows that the changes are equal, making this option incorrect.

2. **Option 3 (1.25):** This option implies that the demand is elastic, meaning the percentage change in quantity demanded is greater than the percentage change in price. Since our calculation shows they are equal, this option is incorrect.

3. **Option 4 (0.33):** This option also suggests inelastic demand, with a much smaller percentage change in quantity demanded compared to the price change. Our calculation shows they are equal, making this option incorrect.

In conclusion, the correct answer is Option 2, as the price elasticity of demand calculated using the given data is 1, indicating unitary elasticity.