CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics
A cooking gas distributor finds that when the price of a cylinder rises, the total expenditure of households on cylinders also rises. What can be concluded about the price elasticity of demand for cylinders in the relevant price range?
Demand is inelastic, with elasticity below 1. When price and total expenditure move in the same direction, the percentage fall in quantity bought is smaller than the percentage rise in price, so spending rises. This is the total outlay test for inelastic demand.
- ADemand is elastic, with elasticity greater than 1
- BDemand is inelastic, with elasticity less than 1Correct
- CDemand is unitary elastic, with elasticity equal to 1
- DDemand is perfectly elastic
Explanation
Under the total outlay method, if price and total expenditure move in the same direction, demand is inelastic (e<1). The percentage fall in quantity is smaller than the percentage rise in price, so revenue rises. Elastic demand would show expenditure falling when price rises.
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