Question

Out of the following four possibilities, which one leads to rise in total expenditure?

Options

• E_d = 1 and price rises

• E_d > 1 and price rises

• E_d < 1 and price rises

• E_d < 1 and price falls

Answer 1

E_d < 1 and price rises

Explanation:

When demand is inelastic E_d < 1, a price rise increases total expenditure because quantity demanded falls proportionately less. With unitary elasticity expenditure stays constant, and with elastic demand a price rise reduces it.