question archive When the price of a certain good was higher than it is now, consumers spent a total of $3 billion annually buying the good
When the price of a certain good was higher than it is now, consumers spent a total of $3 billion annually buying the good
Subject:EconomicsPrice:2.88 Bought3
When the price of a certain good was higher than it is now, consumers spent a total of $3 billion annually buying the good. Then the price decreased and as a result, consumer expenditure on the good (and the producers' revenue) changed to $5 billion annually. Assuming the levels of all demand shift variables remained constant, what can you tell from this information?
a. Only that the quantity demanded increased.
b. Only that the demand curve is downward-sloping.
c. That the quantity demanded increased and that demand for this good is inelastic.
d. That the quantity demanded increased and that demand for this good is elastic.
e. None of the above, because you don't know by how much the price decreased.
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The answer is d. That the quantity demanded increased and that demand for this good is elastic.
Given
- The original market turnover before price change is $3 billion
- The price was decreased and the market turnover increased by $5 billion
There have to be two conditions for the market turnover to increase with price decrease and other things being constant
1) The number of goods demanded must increase.
2) The percentage increase of goods demanded should be greater than the percentage decrease in price, and this is a characteristic of elastic goods.
Only option D satisfies these conditions.
