A decline in the price of good X by Rs. 5 causes an increase in its demand by 20 units to 50 units. The new price is Rs. 15. Calculate elasticity of demand.

Explanation

Let Initial Price `[P]=x`
New Price `[P_(1)]=` [Initial Price] `x-5` [As given that price falls by 5]
New Price `[P_(1)]=15` [Given]
Then, Initial Price [P] = New Price `[P_(1)]+5=15+5=20`
initial Quantity [Q] = 30 [As given quantity increase by 20 units and which goes to 50]
New quantity `[Q_(1)]=50`
`{:("Initial Price (P) = 20" " Initial Quantity (Q) = 30"),("New Price "(P_(1))=15" New Quantity "(Q_(1))=50),(Delta P=[-]5" "Delta Q=20):}`
`PED=(Delta Q)/(Delta P)xx(P)/(Q)=(20)/((-)5)xx(20)/(30)=(400)/((-)150)=(-)2.66`
Negative Sign of ED indicates that inverse relationship between price and quantity demanded.
PED = 2.66 [More than unitary elastic demand or Elastic demand]