Question

When the price of good rises from Rs10 to Rs12 per unit, its demand falls from 25 units to 20 units. What can you say about price elasticity of demand of the good through the 'expenditure approach'?

Answer 1

Given that

`Q_1` = 25

`Q_2` = 20

`P_1` = Rs 10

`P_2` = Rs  12

Hence

Total inital expenditure = `Q_1 xx P_1 = 10 xx 25 = Rs 250`

Total final expenditure = `Q_2 xx P_2 = 20 xx 12` = Rs 240

As total expenditure is falling with a increase in the price of thye commodity, price elasticity of demand for the good is greater than 1