A good is a necessity and has no close substitutes. Its price rises by 10%. What is the likely result?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Its demand is inelastic, so the expenditure on it rises
A necessity with no close substitutes has inelastic demand. Its quantity falls by less than 10%, so spending on it rises.
Option (1) Its demand is inelastic, so the expenditure on it falls — Incorrect. With inelastic demand, expenditure moves in the same direction as price.
Option (2) Its demand is elastic, so the expenditure on it falls — Incorrect. Demand is elastic for luxuries or goods with close substitutes.
Option (3) Its demand is inelastic, so the expenditure on it rises — Correct. Price × quantity goes up.
Option (4) Its demand is unit elastic, so the expenditure on it stays the same — Incorrect. Unit elastic demand needs the fall in quantity to equal the rise in price.
NCERT (2026-27): “2.6.2 Factors Determining Price Elasticity of Demand for a Good The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes of the good. … In general, demand for a necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic. … The demand for a good is likely to be elastic if close substitutes are easily available. On the other hand, if close substitutes are not available easily, the demand for a good is likely to be inelastic.” “2.6.3 Elasticity and Expenditure … The expenditure on the good would change in the same direction as the price change if and only if the percentage change in quantity is less than the percentage change in price, i.e., if the good is price inelastic (see rows 1 and 5 in table 2.5). …” |