A consumer always spends 50% of monthly income on food. A value added tax raises food prices by 20% while income is unchanged. The consumer's price elasticity of demand for food is _______ (in integer).
IIT JAM 2021 Question 48: Demand theory and elasticity
Answer and worked solution
Answer: -1
Spending a constant share of income on food means total food expenditure is fixed regardless of price.
Constant expenditure as price changes is exactly the definition of unit-elastic demand, so the price elasticity is . The answer is .
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
What this question tests
This question is on Price elasticity of demand, part of Demand theory and elasticity in Microeconomics.
How responsive quantity is to price, at a point, along a linear curve, and for constant-elasticity demand.
TestStop has 41 past-paper questions on this subtopic; the nearest in year are below.
Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.