A firm sells 400 units at ₹50. Demand has a price elasticity of 2. By how much must it cut its price to sell 480 units?

Explanation

1. 01

   % change in quantity = (480 − 400) ÷ 400 = 20%.

2. 02

   % change in price needed = 20% ÷ 2 = 10%.

3. 03

   10% of ₹50 is ₹5, so the price must fall to ₹45.