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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

The demand curve for a product is a rectangular hyperbola. Which statement about total expenditure by consumers on the product is correct?

Total expenditure stays constant at every price. On a rectangular hyperbola, price times quantity is always the same, so demand has unitary elasticity at every point. Any percentage fall in price is matched by an equal percentage rise in quantity, so consumer spending does not change.

  1. ATotal expenditure rises as price falls, because elasticity is below one
  2. BTotal expenditure stays constant at every price, because elasticity equals one throughoutCorrect
  3. CTotal expenditure falls as price falls, because elasticity is above one
  4. DTotal expenditure is zero at the highest price and rises steadily as price falls

Explanation

A rectangular hyperbola has price multiplied by quantity equal to a constant, so it shows unitary elasticity at every point. A price change is exactly offset by a proportional quantity change, leaving total expenditure unchanged. The other options describe inelastic or elastic demand, which do not apply.

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