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Question

When the price of a good falls from Rs10toRs8 per unit, its demand rises from 20units to 24 units. What can you say about price elasticity of demand of the good through the 'expenditure approach' ?

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Solution

Given:
Q1=20
Q2=24
P1=Rs10
P2=Rs8
Now we have:
Total initial expenditure=Q1×P1=10×20=Rs200
Total final expenditure=Q2×P2=18×24=R192
since, the total expenditure is falling with a decrease in the price of the commodity, we can say that price elasticity of demand for the good is less than 1.

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