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' ?

Answer 1

Given:

$Q_1=20$

$Q_2=24$

$P_1=Rs10$

$P_2=Rs8$

Now we have:

Total initial expenditure=$Q_1\times P_1=10\times 20=Rs200$

Total final expenditure=$Q_2\times P_2=18\times 24=R192$

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.