a. Price Elasticity of Demand = Proportionate change in the quantity demanded Proportionate change in Price

e p = ∆Q X P

∆P Q 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:

e p= ∆Q X P

∆P Q

e p= 5,000100

× 500

20,000

e p= 25,00,00020,00,000

e p= 2520

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 :

e y = Percentage Change∈quantity demanded

Percentagechange∈income

Where,

Percentage change in quantity demanded =

NewQuantity demanded−Originalquantity demanded(∆Q)Originalquantity demanded(Q)

Percentage change in income =

New Income−Original Income (∆Y )Original Income (Y )

Thus the formula to calculate the income elasticity of demand is as follows:

e y = ∆Q∆Y

×YQ

Where:

Q is original quantity demanded

Q1 is new quantity demanded

∆Q = Q1 – Q

Y is original income

∆Y = Y 1 - Y 2

Therefore given that:

Y = Rs. 15,000

Y 1 = Rs. 20,000

∆Y = 20,000 – 15,000 = 5,000

Q = 35 units

Q1=¿40 units

∆Q=¿40 – 35 = 5

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

e y = ∆Q∆Y

×YQ

Substituting the values we get:

e y = 5

5,000×

15,00035

e y=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 change∈quantity demandedof XPercentagechange∈price of Y

Where,

Percentage change in quantity demanded of X =

Change∈demand for X (∆QX )Originaldemand 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

×PYQX

Where:

ecis the cross elasticity of demand

Q xis the original quantity demanded of product X

∆Q x is change in quantity demanded of product X

P yis original price of product Y

∆ P yis the change in the price of product Y

So therefore substituting the values given that:

X = detergent cakes Y = detergent powder

Q x= 400

∆Q x= 100 ( 500 – 400 )

P y = Rs. 20

∆ P y= 5 (25 – 20)

∴ ec=∆QX∆PY

×PYQX

Substituting the values we get:

ec = 100

5×

20400

ec=20002000

ec=1

2) Complete the following table:

Output Units (Q)

Total Cost (TC)

Average Total cost

= Totalcost

Q

Fixed Cost

Average Fixed Cost

= FC/Q

Total Variable

cost = TC – FC

Average Variable Cost = TVC/Q

Marginal costs =

Change in TC/Change

in output

0 100 0 100 0 0 0 0

25 150 6 100 4 50 2 2

50 200 4 100 2 100 2 2

75 250 3.33 100 1.33 150 2 2

100 300 3 100 1 200 2 2

125 350 2.8 100 0.8 250 2 2

150 400 2.66 100 0.66 300 2 2

175 450 2.57 100 0.57 350 2 2

200 500 2.5 100 0.5 400 2 2