Multiple choice

If the demand for a good is inelastic, an increase in its price will cause the total expenditure of the consumers of the good to

  1. remain the same

  2. increase

  3. decrease

  4. any of the these

Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When demand is inelastic (elasticity < 1), % change in quantity is SMALLER than % change in price. When price increases, the quantity decrease is proportionally less, so total expenditure (P × Q) increases. Example: price up 20%, quantity down 10% (inelastic). New expenditure = 1.2P × 0.9Q = 1.08PQ (8% increase). This is why inelastic goods (essential items) can generate more revenue when prices rise.

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