Question

Suppose price elasticity of demand for a good is -0.2. How will the expenditure on the good be affected if there is a 10% increase in the price of the good?

Solution

e D italic space italic equals italic space fraction numerator italic % italic space C h a n g e italic space i n italic space d e m a n d over denominator italic % italic space C h a n g e italic space i n italic space p r i e end fraction italic minus italic 0 italic. italic 2 italic equals fraction numerator italic % C h a n g e italic space i n italic space d e m a n d over denominator italic 10 end fraction

% change in demand = -0.2 × 10 = -2

According to the expenditure method if % change in demand (here 2%) is less than % change in price (10%) (i.e., if good is price inelastic) expenditure on good will change in the direction of price change. As price has increased, so expenditure in good will increase.

Some More Questions From Theory Of Consumer Behaviour Chapter

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Theory Of Consumer Behaviour

Suppose price elasticity of demand for a good is -0.2. How will the expenditure on the good be affected if there is a 10% increase in the price of the good?

Some More Questions From Theory Of Consumer Behaviour Chapter

Define indifference curve.

What is meant by marginal rate of substitution (MRS)?

Why is MRS always diminishing?

When does a consumer attain equilibrium according to indifference curve approach?

Give meaning of demand.

Name two determinants of demand.

List the factors that cause changes in demand.

What is law of demand?

What is demand schedule?

Why does demand curve slope downwards?

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