what is the original price of a commodity when price elasticity is 0.71/- & demand changes from 20 units to 15 unit & new price is 10/-? answer 15 please explain why?
1 Replies
Tejaswi Kasturi
(student-cpt)
(427 Points)
Replied 06 May 2012
The price elasticity of demand is positive in this case( usually it is negative ) which means you are dealing with a giffen good or a veblen good. now price elasticity of demand is % change in quantity /% change in price
demand changed from 20 to 15 % change is ((15-20)/2)/((15+20)/2)*100 = -100/7
let the price be p. percentage change in price is ((10-p)/2)/((10+p)/2)*100 = (10-p)/(10+p)*100
therfore (p+10)/(7(p-10)) = 0.71
solve for p and you will get 15.03(aprroximately 15)
for more information on giffen or veblen good see the following links
https://en.wikipedia.org/wiki/Veblen_good
https://en.wikipedia.org/wiki/Veblen_good
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