Question

Assume that an effective government-imposed price on a particular good. The price is set below equilibrium....

Assume that an effective government-imposed price on a particular good. The price is set below equilibrium. Now, let the imposed price be removed. Will it be true, false or uncertain that the consumer spending on the good will increase only if demand is inelastic. Explain your answer.

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Answer #1

Elasticity of demand is defined as change in demand due to change in price of the good or service. When the change in demand is less as compared to change in price or there is no change in demand due to price change, then the demand is said to be inelastic. Consumer spending on a good increases or decreases due to price changes when the demand for good is elastic. There is not much change in consumer spendings if the product's demand is inelastic. Therefore, it is false that the consumer spending on the good will increase only if the demand is inelastic.

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