Suppose the price of mangoes increases from ₹ 50 per kg to ₹ 75 per kg. Due to this, the demand for mangoes declines from 100 kg to 50 kg. Which one of the following is the price elasticity of demand for mangoes?
- A.4
- B.3
- C.2
- D.1
Correct answer
Explanation
The correct answer is D, 1. The quantity demanded falls by 50% while the price rises by 50%, and 50 divided by 50 gives a price elasticity of 1.
Price elasticity of demand measures how strongly the quantity demanded responds to a change in price: percentage change in quantity demanded divided by percentage change in price. Here the price rises by ₹ 25 on a base of ₹ 50, which is 50%, and demand falls by 50 kg on a base of 100 kg, which is also 50%. The ratio is 1 (ignoring the minus sign, as is usual), so demand is unitary elastic: total spending on mangoes stays the same whether the price moves up or down slightly.
A is wrong because an elasticity of 4 would need demand to fall four times as fast as the price rises. B and C are wrong for the same reason, giving 3 and 2 times the proportional change, which the figures do not show.
Exam tip: elasticity = % change in quantity ÷ % change in price; equal to 1 means unitary elastic, above 1 elastic, below 1 inelastic.
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