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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.
Solution
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.
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