Question

8 units of a good are demanded at a price of Rs 7 per unit. Price elasticity of demand is (−) 1. How many units will be demanded if the price rises to Rs 8 per unit? Use expenditure approach of price elasticity of demand to answer this question. 

Answer 1

Given: 

Initial Quantity Demanded=8units 

Initial Price= Rs 7

We know, 

`"Total Expenditure"="Price"xx"Quantity"` 

⇒ Initial Total Expenditure=`7xx8` 

Or , Inittial Total Expenditue=Rs 56  

Since, `E_d`=1, this implies that total expenditure after price rises to Rs 8 remains the same 

⇒ Final Total Expenditure= Rs 56 

Or,`56=8xx"Quantity"'=7"units"` 

Thus , When the price rises to Rs 8, the qunatity demanded falls to 7 units.