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Question
A consumer buys 27 units of a good at a price of Rs 10 per unit. When the price falls to Rs 9 per unit, the demand rises to 30 units. What can you say about price elasticity of demand of the good through the 'expenditure approach'?
Solution
Given that
`Q_1` = 27
`Q_2`= 30
`P_1` = Rs 10
`P_2` = Rs 9
Therfore
Total initial expenditure = `Q_1 xx P_1 = 270`
Total final expenditure = `Q_2 xx P_2 = 270`
As there is fall in the price of good, the total expenditure remains constant, so it implies that demand for the good is unitary elastic i.e. |ed| = 1.
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