Question

Suppose the own price elasticity of demand for good X is −0.5, and the price of good X increases by 10 percent. What would you expect to happen to the total expenditures on good X?

Answer 1

Answer:

a 10% increase in price will reduce the demand and total expenditures on good X by 5%.

Explanation:

Price elasticity of demand(PED) is the degree of responsiveness of demand to a change in price.

Where a percentage change in price produces a more than a proportional change in quantity, we say the product is price elastic. On the other hand, where a change in price produces a less than a proportional change in quantity demand, then demand is price inelastic

PED is computed as follows:

PED = % change in quantity /% change in Price

So we can apply this formula to this question

0.5 = m/10

m = 0.5 × 10

m = 5.

m= 5%

From the computation above , it is deduced that a 10% increase in price will reduce the demand and total expenditures on good X by 5%.