Understanding Elasticity of Demand

If the price of a good increases from ₹10 to ₹12 and the quantity demanded decreases from 100 units to 90 units, what is the price elasticity of demand?

Which of the following formulas correctly represents the Price Elasticity of Demand (PED)?

• Perfectly elastic demand

• Unitary elastic demand

• Perfectly inelastic demand

• Relatively elastic demand

If the income of a consumer increases by 20% and the quantity demanded of a good increases by 40%, what is the income elasticity of demand, and how would you classify this good?

• X and Y are substitute goods

• X and Y are unrelated goods

• X and Y are complementary goods

• X and Y are inferior goods

A firm selling a product with highly elastic demand decides to increase its price. Using the concept of elasticity of demand, analyze what will happen to the firm's total revenue after the price increase.

• Total revenue will increase because consumers will pay the higher price

• Total revenue will remain unchanged because elasticity does not affect revenue

• Total revenue will decrease because the proportionate fall in quantity demanded will be greater than the proportionate rise in price

• Total revenue will increase because fewer units are sold at a higher price

Consider two goods: salt and luxury cars. Using the determinants of elasticity of demand, explain why the elasticity of demand for luxury cars is higher than that for salt.

• Salt has more substitutes than luxury cars, making its demand more elastic

• Luxury cars are necessities, so consumers are more sensitive to price changes

• Luxury cars are non-essential goods with many substitutes and take a large proportion of income, making their demand more elastic than salt, which is a necessity with no close substitutes

• Salt has a higher proportion of income spent on it, making its demand more inelastic

A government wants to impose a tax on two goods — medicine and designer handbags — to maximize tax revenue. Using the concept of price elasticity of demand, which good should be taxed more heavily, and why?

• Designer handbags, because their inelastic demand ensures consumers will continue buying them regardless of price

• Medicine, because its perfectly elastic demand means consumers will absorb the tax easily

• Medicine, because its inelastic demand means the quantity demanded will not fall significantly even after the tax-induced price rise, ensuring higher tax revenue

• Designer handbags, because their elastic demand means more units will be sold after taxation

The price of good A falls by 10%, causing the quantity demanded of good B to rise by 15%. Using cross elasticity of demand, determine the value of cross elasticity and reason out the nature of the relationship between goods A and B.