Suppose the own price elasticity of demand for good X is −5,and the quantity of good X decreases by 5 percent.What would you expect to happen to the total expenditures on good X?
A) Increase
B) Decrease
C) Unchanged
D) Neither increase, decrease, nor remain unchanged

Question

Suppose the own price elasticity of demand for good X is −5,and the quantity of good X decreases by 5 percent.What would you expect to happen to the total expenditures on good X?
A) Increase 
B) Decrease
C) Unchanged
D) Neither increase, decrease, nor remain unchanged

Quizplus · Accepted Answer

If the own price elasticity of demand is -5, this means that a 1% increase in price will result in a 5% decrease in quantity demanded. Given that the quantity of good X decreased by 5%, we can infer that the price of good X increased by 1%. Using the formula for total expenditures (Price x Quantity), we can see that a 1% increase in price and a 5% decrease in quantity will result in a (1% increase - 5% decrease) = 4% decrease in total expenditures. Therefore, we would expect total expenditures on good X to decrease.

Suppose the Own Price Elasticity of Demand for Good X