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Question
Suppose the price elasticity of demand for a good is −0.2. How will the expenditure on the good be affected if there is a 10% increase in its price ?
Solution
Price elasticity of demand = −0.2
Percentage increase in price = 10%
`e_d = ( "Precentage change in demand ")/("Precentage change in price ")`
`0.2 = ( "Precentage change in demand ")/10`
−2 = Percentage change in demand
Thus, percentage decrease in demand is less than the percentage increase in price. This means that when price increases and ed < 1, the demand is inelastic and hence, the expenditure will increase.
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