Question

When the price of a good falls from Rs 10 to Rs 8 per unit, its demand rises from 20 units to 24 units. What can you say about price elasticity of demand of the good through the expenditure approach?

Answer 1

Given that

`Q_1 = 20`

`Q_2 = 24`

`P_1 = Rs 10`

`P_2 = Rs 8`

Total initial expenditure = `Q_1 xx P_1 = 10 xx 2 = Rs 200`

Total newexpenditure = `Q_2 xx P_2  = 8 xx 24 = Rs 192`

Since, the total expenditure is falling with a decrease in the price of the commodity, the price elasticity of demand for the good is less than 1.