In the small town of Springfield,Duffman observes that the price of beer has fallen.Duffman concludes that the total amount of money spent buying beer has to fall since the price of beer is lower now.Is he correct? Why or why not? Clearly explain your answer.

Question

Quizplus · Accepted Answer

The Answer is Duffman is incorrect in arguing that a lower cost of beer has to reduce the total amount of money spent on buying beer.Total spending on beer (total revenue to the industry)is the product of price and quantity.A lower price of beer certainly reduces per-unit revenue,but the law of demand implies more people will drink beer at the lower price.So the quantity of beer demanded increases.It is uncertain whether total spending on beer will increase or decrease: It depends on the elasticity of demand for beer.If the demand for beer is inelastic,then total spending would drop.But if the demand for beer is elastic,then total spending on beer would increase at the lower price,as the quantity sold would have increased substantially.

In the Small Town of Springfield,Duffman Observes That the Price