Question

If the percentage change in quantity demanded is equal to the percentage change in price for small changes in price and quantity near the point on a linear demand function graph corresponding to the price of $15 per unit at which the quantity demanded is 1,000 units, what is the effect on total consumer expenditure on the good if there is a relatively large increase in price to above $15?

a) Total consumer spending on the good will increase

b) Total consumer spending on the good will decrease

c) Total consumer expenditure will be unchanged.

d) One cannot tell without knowing more information

Answer 1

Option C is correct - Total consumer expenditure will be unchanged.

We know that , price elasticity of demand = % change in quantity demanded / % change in prices

Since % change in quantity demanded = % change in prices, price elasticity of demand = 1

With unitary price elasticity of demand, any change in prices (rise or fall) does not change the total expenditure.

Thus with the increase in price above $15, there will be no change in total expenditure , given unitary elastic demand.