a.

Price Elasticity of Demand = Proportionate change in the quantity demanded

Proportionate change in Price

ep = Q X P
P

Where:

e p = Price elasticity of demand

P = Initial price

P = Change in price

Q = Initial Quantity demanded

Q = Change in quantity demanded

Here:
P = Rs. 500

P = Rs. 100 (a fall in price i.e 500 400)

Q = 20,000 units

Q = 5,000 ( 25,000 20,000)

By substituting these values in the above formula:

ep = Q X P
P

ep =

5,000
100

ep =

500
20,000

25,00,000
20,00,000

ep =

25
20

e p = 1.25 ( 1
Thus the price elasticity of demand is greater than 1.
Therefore it is relatively elastic demand.
b. Income Elasticity can be stated as :

ey =

Percentage Changequantity demanded

Percentage changeincome

Where,
Percentage change in quantity demanded =

New Quantity demandedOriginal quantity demanded(Q)

Original quantity demanded(Q)

Percentage change in income =

New IncomeOriginal Income ( Y )

Original Income(Y )
Thus the formula to calculate the income elasticity of demand is as follows:

ey =

Q Y

Y Q

Where:
Q is original quantity demanded

Q1 is new quantity demanded

Q = Q1 Q

Y is original income

Y = Y1 - Y2

Therefore given that:

Y = Rs. 15,000

Y 1 = Rs. 20,000

Q = 35 units

Q1= 40 units

Q= 40 35 = 5

= 20,000 15,000 = 5,000

The formula for calculating income elasticity of demand is as follows:

ey =

Q Y

Y Q

Substituting the values we get:

ey =

e y=

5
15,000

5,000
35

75,000
1,75,000
e y = 0.4285 ( 1

Therefore it is less than unitary income elasticity of demand.

c. The cross elasticity of demand can be measured as:

Percentage changequantity demanded of X

Percentage change price of Y
Where,
Percentage change in quantity demanded of X =

Changedemand for X ( QX )
Original demand for X (QX )

Percentage change in price of Y =

Change price for Y ( PY )

Original price for Y (PY )
Therefore cross elasticity is stated as

ec=

QX PY

PY QX

Where:

e c is the cross elasticity of demand

Qx is the original quantity demanded of product X

Q x is change in quantity demanded of product X

P y is original price of product Y

P y is the change in the price of product Y

So therefore substituting the values given that:

X = detergent cakes
Y = detergent powder

Qx = 400

Q x = 100 ( 500 400 )

P y = Rs. 20

P y = 5 (25 20)

ec =

QX PY

PY QX

Substituting the values we get:

ec =

100 20

5
400

ec=

2000
2000

e c =1

2) Complete the following table:

Average
Total cost
=

Average
Variable
Cost =
TVC/Q

Marginal
costs =
Change in
TC/Change
in output

Fixed
Cost

Average
Fixed Cost
= FC/Q

Total
Variable
cost = TC
FC

100

150

100

50

50

200

100

100

75

250

3.33

100

1.33

150

100

300

100

200

125

350

2.8

100

0.8

250

150

400

2.66

100

0.66

300

175

450

2.57

100

0.57

350

200

500

2.5

100

0.5

400

Output
Units
(Q)

Total
Cost
(TC)

100

25

Total cost
Q