EXAMPLES

Q.1 REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 TO Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .

Q. 2 10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%

INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
ELASTICITY OF DEMAND?

Q. 3 DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR

WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.
Q. 4 PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME
Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.

Q.5 PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY

WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?
Q.6 CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5
WHEREAS DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE
OF KITKAT IS REDUCED FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY
IS BROUGHT DOWN FROM Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE
IN DEMAND FOR CADBURY?

Q.7 A MANAGER BELIEVES THAT THE DEMAND FOR HIS PRODUCT IS GIVEN
BY THE EQUATION P = 50 – Q/100. FIND Ed IF PRICE CHANGES FROM Rs. 10
TO Rs. 12.
Q.8 A MARKET CONSISTS OF TWO INDIVIDUALS. THEIR DEMAND EQUATIONS ARE
Q1 = 100 – 4P ; Q2 = 80 – 2P. FIND;
a] MARKET DEMAND FUNCTION
b] Ed FOR THE PRODUCT IN THE MARKET WHEN PRICE RISES FROM Rs. 10
TO Rs. 15.

Q.9 WHEN INCOME OF A HOUSEHOLD WAS Rs. 10,000, IT PURCHASED

5 kg. OF A PARTICULAR GOOD. ITS INCOME INCREASES FROM
Rs. 10,000 TO Rs. 12500 AND AT THE SAME TIME, THE PRICE OF THE
SUBSTITUTE OF THIS GOOD REDUCES FROM Rs. 20 TO Rs. 16.
ESTIMATE THE NEW DEMAND FOR THIS GOOD. GIVEN THAT INCOME
Ed = + 1.2 & CROSS Ed w.r.t. THE SUBSTITUTE = + 0.8.
Q.10
Price of X Price of Y Income Demand (x) Demand (Y)

10 12 15000 80 60

10 15 16000 120 40

12 15 15000 90 30

9 14 17000 90 40

12 17 15000 110 20

12 15 16000 108 50

CALCULATE : 1] Price elasticity of demand for X

2] Price elasticity of demand for Y
3] Income elasticity of demand for X
4] Cross elasticity demand for X w.r.t. Price of Y
 SOLUTION : - 1

REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 FROM Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .

ARC Ed = (ΔD/ΔP) * (P1 + P2)/(D1 + D2)

ΔD = +3000, ΔP = -2000, (P1 + P2) = 58000, (D1+D2) = 11000

ARC Ed = (+3/-2)* (58000/11000) = - 7.9

 SOLUTION : - 2

10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%

INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
EALASTICITY OF DEMAND?

% change in sales volume

Promotional Ed =
% change in advertisement expenditure

= 4/10 = +0.4
 SOLUTION : - 3

DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR

WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.

Income elasticity of demand = 0.6

5% increase in income will lead to 3% increase in demand for wheat

3% increase on 50 million = 1.5 million

Estimated demand = 51.5 million

 SOLUTION : - 4

PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME

Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.

Income elasticity of demand = + 0.75

20% increase in income will lead to 15% increase in demand

Price elasticity of demand = - 0.5

+
Demand will INCREASE by 5% as a result of 10% fall in
price
New Demand will be 20% more than the initial demand.
 SOLUTION : - 5

PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY

WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?

Cross elasticity of demand for X w.r.t. price of Y = + 1.2

10% reduction in price of Y will cause 12% reduction in demand for X

In order to keep sales volume unchanged, demand for X should rise by 12%

Price elasticity of demand = - 0.6

20% reduction in the price will help to push up demand by 12%

The price of X should be reduced by 20%

 SOLUTION : - 6

CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5 WHEREAS

DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE OF KITKAT IS REDUCED
FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY IS BROUGHT DOWN FROM
Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE IN DEMAND FOR CADBURY?

The price of Kitkat is reduced from Rs.10 to Rs.8 i.e. 20% reduction

Cross elasticity of demand for Cadbury w.r.t. price of Kitkat = + 0.5

20% reduction in price of Kitkat will reduce demand for Cadbury by 10%

Cadbury reduces price from Rs. 15 to Rs. 12 i.e. 20% reduction

Demand for Cadbury is unitary elastic i.e. 1

20% reduction in price will push up its demand by 20%

NET EFFECT IS 10% RISE IN DEMAND FOR CADBURY

 SOLUTION : - 7

A MANAGER BELIEVES THAT THE DEMAND FOR HIS PRODUCT IS GIVEN

BY THE EQUATION P = 50 – Q/100. FIND Ed IF PRICE CHANGES FROM Rs. 10
TO Rs. 12.

WE CAN FIND DEMAND (Q) AT P = 10 & 12 FROM THE GIVEN DEMAND

FUNCTION.

10 = 50 – Q/100 12 = 50 – Q/100 Ed = DD ÷ DP * P ÷ D

Q/100 = 50 – 10 Q/100 = 50 – 12
= [ -200 ÷ 2 ] * [10 ÷ 4000]

Q/100 = 40 Q/100 = 38 = [-100] * [1 ÷ 400]

Q = 4000 Q = 3800 = - O.25

 SOLUTION : - 8
A MARKET CONSISTS OF TWO INDIVIDUALS. THEIR DEMAND EQUATIONS ARE
Q1 = 100 – 4P ; Q2 = 80 – 2P. FIND;
a] MARKET DEMAND FUNCTION
b] Ed FOR THE PRODUCT IN THE MARKET WHEN PRICE RISES FROM Rs. 10
TO Rs. 15.

a] MARKET DEMAND Q = Q1 + Q2 = (100 – 4P) + (80 – 2P)

= 180 – 6P

b] WHEN P = 10, Q = 180 – 6 (10) = 120 Ed = (DD ÷ DP) * (P ÷ D)

& WHEN P = 15, Q = 180 – 6 (15) = 90 = (-30 ÷ 5) * (10 ÷ 120)

= - 0.5
 SOLUTION : - 9

WHEN INCOME OF A HOUSEHOLD WAS Rs. 10,000, IT PURCHASED

5 kg. OF A PARTICULAR GOOD. ITS INCOME INCREASES FROM
Rs. 10,000 TO Rs. 12500 AND AT THE SAME TIME, THE PRICE OF THE
SUBSTITUTE OF THIS GOOD REDUCES FROM Rs. 20 TO Rs. 16.
ESTIMATE THE NEW DEMAND FOR THIS GOOD. GIVEN THAT INCOME
Ed = + 1.2 & CROSS Ed w.r.t. THE SUBSTITUTE = + 0.8.

INCOME INCREASES BY 25%, INCOME Ed = + 1.2,

SO DEMAND SHOULD INCREASE BY 30%

PRICE OF THE SUBSTITUTE REDUCES BY 20%, CROSS Ed w.r.t. THE

SUBSTITUTE = + 0.8. SO, DEMAND SHOULD FALL BY 16%

NET EFFECT = 14% RISE IN DEMAND

NEW DEMAND = 5.7 kg.

 SOLUTION : - 10

Price of X Price of Y Income Demand (x) Demand (Y)

10 12 15000 80 60

10 15 16000 120 40
1

12 15 15000 90 30
2 /4
9 14 17000 90 40
3
12 17 15000 110 20
2 /4
12 15 16000 108 50
1
CALCULATE : 1] Price elasticity of demand for X (- 0.58)
2] Price elasticity of demand for Y (- 3.2)
3] Income elasticity of demand for X (+6.975)
4] Cross elasticity demand for X w.r.t. Price of Y (+1.6)