Suppose the own price elasticity of demand for good X is −0.25,and the quantity of good X increases by 5 percent.What would you expect to happen to the total expenditures on good X?
A) Increase
B) Decrease
C) Remain unchanged
D) Neither increase, decrease nor remain unchanged

Question

Quizplus · Accepted Answer

Given elasticity of demand for good X is -0.25, which means that a 1% increase in the price of good X leads to a decrease in the quantity demanded by 0.25%.

Since the quantity of good X has increased by 5%, we can expect that the price has decreased proportionately, which would lead to an increase in the quantity demanded.

However, the price decrease is expected to be greater than the quantity increase. Moreover, because the demand is inelastic, the overall change in expenditure would be negative. Therefore, we can expect that the total expenditures on good X would decrease.

Suppose the Own Price Elasticity of Demand for Good X