Read the following statements carefully. Statement 1: If the good is…

The correct answer is option 1: All three statements are true.

The relationship between price elasticity of demand and total expenditure (price × quantity) depends on the elasticity of the good:

1. Statement 1: If the good is price-elastic, the expenditure on the good would change in the opposite direction as the price change. – True

   • A price-elastic good means that demand is highly responsive to price changes.
   • If price decreases, demand increases significantly, leading to higher total expenditure.
   • If price increases, demand decreases significantly, leading to lower total expenditure.
   • Thus, total expenditure moves in the opposite direction of price changes.

2. Statement 2: If the good is price inelastic, the expenditure on the good would change in the same direction as the price change. – True

   • A price-inelastic good means that demand is not very responsive to price changes.
   • If price increases, demand falls slightly, but since the price is higher, total expenditure increases.
   • If price decreases, demand rises slightly, but since the price is lower, total expenditure decreases.
   • Thus, total expenditure moves in the same direction as price changes.

3. Statement 3: If the good is unit-elastic, the expenditure on the good would remain unchanged. – True

   • In a unit-elastic demand situation, a percentage change in price leads to an equal percentage change in quantity demanded.
   • As a result, the increase in price is exactly offset by the fall in quantity demanded, leaving total expenditure unchanged.