Question

Determine the price elasticity of demand for commodity X, if a 15% increase in its price:

a) has no impact on its total expenditure.

b) reduces total expenditure.

c) increases total expenditure.

Answer 1

a )

Price elasticity of demand = % change in Qd / % change in P

If the change in price has no impact on expenditure that means % change in Qd must be zero. Now, if numerator is zero, e_{p =} 0.

( b )

if total expenditure is reduced, it means % change in Qd has reduced and therefore price elasticity of demand is less than 1.

( c )

if total expenditure is increased, it means % change in Qd has increased and therefore price elasticity of demand is greater than 1.