Question

A consumer buys 40 units of a good at a price of ₹ 3 per unit. When price rises to ₹ 4 per unit, he buys 30 units. Calculate e_P by the expenditure method.

Answer 1

Initial Price P₁ = ₹ 3,

Quantity Q₁ = 40

New Price P₂ = ₹ 4,

Quantity Q₂ = 30 

Initial Expenditure (E₁) = P₁ × Q₁ = 3 × 40 = ₹ 120

New Expenditure (E₂) = P₂ × Q₂ = 4 × 30 = ₹ 120

Since expenditure remains the same despite change in price, this is the case of Unitary Elastic Demand.

e_P = 1