Suppose the 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 its price?

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Solution

Price elasticity of demand = −0.2

Percentage increase in price = 10%

−2 = Percentage change in demand

Thus, percentage decrease in demand is less than the percentage increase in price. This means that when price increases and e_d < 1, the demand is inelastic and hence, the expenditure will increase.

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