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Home Questions QZAS3HRT25
Target Exam

CUET

Subject

Economics

Chapter

Micro Economics: Theory of Consumer behaviour

Question:

If the price of a commodity increases by 20%, its demand drops by 20%. Then how it will affect the expenditure?

Options:

Decline in expenditure.

Rise in expenditure.

No change in expenditure.

Small increase in expenditure.

Correct Answer:

No change in expenditure.

Explanation:

The correct answer is Option (3) → No change in expenditure.

Note : The given answer is as per NTA and NCERT. However, the above table discusses the concept of relationship between elasticity and change in expenditure of a commodity. In the given question, the concept of elasticity is not referred to. In strictest terms, the answer of this question should be Option 1 : Decline in expenditure as explained below:
 
Let $P_0​$ and $Q_0​$​ be the initial price and demand, and $E_0​$​ be the initial expenditure.

The changes are:

  1. Price increases by 20%: $P_1​$​= $P_0​$​×(1+0.20)=1.20 * $P_0​$

  2. Demand drops by 20%: $Q_1​$​​=$Q_0​$​​×(1−0.20)=0.80* $Q_0​$​

  3. $E_1​$=$P_1​$​×$Q_1​$ i.e. (1.20* $P_0​$​)×(0.80 * $Q_1$​​)

     or $E_1​$​=0.96×$E_0$

  4. Since the new expenditure ($E_1​$​) is 0.96 times the initial expenditure ($E_0​$​), the total expenditure has decreased by 4%. 

  5. (1−0.96)×100=4% decline

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