When a consumer’s demand for a good is inelastic, a higher price will: A) fail to reduce the quantity demanded for the good. B) lead to an increase in total expenditures for the good. C) generally reduce total expenditures for the good. D) have no impact on the demand for the good. Your answer: D was incorrect. The correct answer was B) lead to an increase in total expenditures for the good. --I understand why B is correct, but isn’t D correct as well? A decrease or increase in prices for an inelastic demand curve will have no impact on the demand. Is this an error or something for Scheweser QBank?
don’t assume inelastic mean “perfectly inelastic”
char-lee is right. is there a difference between A and D?
D is actually correct as well, and B is correct. A and C are wrong.
Dreary Wrote: ------------------------------------------------------- > D is actually correct as well, and B is correct. A > and C are wrong. D is not correct. The answer is incorrect because the question does not explicitly state that the elasticity is PERFECTLY inelastic. D only holds true when the elasticity is perfectly inelastic.
D is perfect inelasticity (the demand curve is actually a straight line parallel to the price ax). Remember the Total Revenue Test: Price cut & increase revenue, then elasticity>1, demand elastic Price cut& decrease revenue, then elasticity<1, demand inelastic Price cut & no change in revenue, then elasticity =1, demand unit elastic Or Price increase & increase revenue, then elasticity<1, demand inelastic Price increase & decrease revenue, then elasticity>1, demand elastic Price increase & no change in revenue, then elasticity =1, demand unit elastic
Choice D says “have no impact on the demand for the good”, which is correct, regardless of whether it was perfectly inelastic, or even perfectly elastic demand. Demand does not change because price has changed.
I think the problem is confusing “demand” with “quantity demanded”. Strictly speaking, an increase in price will not affect (ie. shift or change the shape of ) the demand curve itself - just the quantity demanded. Nevertheless, in the context of the question, it seemed pretty clear that the question was in reference to the relationship between elasticity & revenue, and not about a shift in the demand curve.
Absolutely, and that’s why you would choose B over D, even if you believed D was correct.
To be honest I gave answer wrong intially. B. is right and only possible answer. The magnitude of change in demand with respect to change in price is very small in case of Inelastic demand. A) fail to reduce the quantity demanded for the good. Incorrect. even though very less, quantity demanded will go down when price go up. D) have no impact on the demand for the good. Incorrect. For the same above reason. Higher price will increase the total expenditure for the good.
wow…Qd and D tricky
I still don’t understand why the correct answer is B. Could someone please explain why a higher price would actually increase total expenditure? Wouldn’t a supplier only increase total cost if the demand for product were elastic? Since a price increase decreases total revenue when demand is inelastic, why would suppliers increase total expenditures and decrease revenue? I’m a bit confused
Take the extreme case: Demand is a vertical line, with equilibrium at $10, and quantity demanded at 100,000 items. Now if the price increases to $11, people still demand 100,000 items. Total expenditure increases.
Oh yes thank you. I initially looked at the question from the suppliers’ side. I see why now. The quantity demanded does not change because the demand is inelastic. A higher variable being the price will lead to a higher total price paid by consumers, NOT suppliers. Thank you
kguizo good point “QUANTITY demanded does not change because the DEMAND is inelastic” …no wonder (D) is false. There should be no impact on the QUANTITY demanded of the good.
No, that’s not correct, but you’re almost there. Only in this extreme case, quantity demanded does not change. It should change if the curve wasn’t perfectly inlestic. - Make the curve almost vertical, i.e. slightly tiltled to the left. - Assume price =$10, and quantity demanded 100,000. - Increase the price to $11. - Quantity demanded does decrease, but only by a small amount, because the curve is almost vertical. Quantity demanded does change, but not the demand itself, i.e., not the demand schedule.
Dreary Wrote: ------------------------------------------------------- > Absolutely, and that’s why you would choose B over > D, even if you believed D was correct. That makes more sense to me. I didn’t look recently, but when I read that part in the CFAI book. “Price” isn’t listed as a factor affecting demand. Income and susbtitute products among other things affect DEMAND
This is a poorly stated question. Even though the best answer is (b), I can see where people get confused by the answer in (d). Price change does not affect the demand schedule; just the quantity demanded. I’m not sure where people are coming from when they say that’s only true in perfectly inelastic demand. It’s not. A change in demand is a shift in the demand curve. Those shifts are driven by consumer preferences and the prices of complementary and supplementary goods. Here’s my approach by process of elimination: First, by reading the question you invoke the rules you know. When demand is inelastic, then price up means revenue up. By inelastic, also, we’re not talking of a demand curve that has a large slope coefficient (when you take the absolute value). Look in your text book and you’ll see a picture perfect demand curve where the upper portion is elastic, mid section is unit elastic, and lower portion is inelastic. (a) This runs counter to the law of demand. A increase in price will decrease qty demanded. The only exception is when demand is perfectly inelastic (think of the demand for insulin). But we shouldn’t make assumptions if the questions does not provide them. So scratch this answer. Now we’re left with three answers. (B) and © are actually diametrical in concept. So either the answer is one or the other, or neither if the statements are irrelevant to the questions on hand. Since you know the rule regarding inelastic demand, (b) trumps ©. So scratch ©. You’re left with (b) and (d). When arguing on a technical basis, there’s really no counterpoint to answer (b). It’s the rule. Answer (d) is somewhat subjective. Why? Because we all live on finite income for a given period of time. If the price of something goes up, even though that affects the quantity demanded in the short term, we may alter our tastes or search for cheaper substitutes in long term. In this case demand changes, but not necessarily in the form of a shift, but in the form of a rotation from less elastic to more elastic. Hence, we’d be looking at long run demand curve. Again, these are assumptions. The problem never gives us a reference to time horizon, or changing preferences. So we can’t get too carried away. Still confused about (d)? That’s ok. The answer that leaves the least doubt should be your answer. And that is (b).
well said, gdiddy.