# QBank Econ question

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) generally reduce total expenditures for the good. C) lead to an increase in total expenditures for the good. D) have no impact on the demand for the good. Choices sounds unreasonable to me, please support your answer with comments.

A? because demand is inelastic so with higher prices the same quantity will be demanded. Explanation kind of sucks… sorry

Inelastic: think medicine, gasoline.

it is A. Just bear in mind: Demand Inelastic: when a 1% change in the items price produce less than 1% change in the quantity demanded. Therefore quantity is not flexible. Demand Elastic: when a 1% change in the items price produce more than1% change in the quantity demanded. Therefore quantity is very flexible. I hope this help

I thought the answer was D though. Since it is ‘inelastic’, assuming it to be purely inelastic, it should not affect the demand at all. But Schweser suggests the answer to be C! I think that is not wrong, but D is a better answer - how would you guys suggest?

Why not C ?? Since you pay more and quantity demanded hasn’t gone down, so consumer’s expenditure goes up at new higher price.

Well…in this case, lets analyze it properly. 1) The relationship between Price-Quantity demanded in normally negative. 2) In the case the demand is inelastic, in the graph the relationship price-quantity is rapresented by a vertical line, meaning that a change in price will not effect quantity. Now lets have a look at the question: When a consumer’s demand for a good is inelastic, a higher price will: A) fail to reduce the quantity demanded for the good (Ambiguous price-quantity relationship as a vertical line). B) generally reduce total expenditures for the good (false as price are increasing). C) lead to an increase in total expenditures for the good (Possibly true, because at the same quantity (considering the vertical relationship) price will increase, and hence also total expenditure). D) have no impact on the demand for the good (Possibly true but incomplete because as explained in answer C, it will also lead to an increase in total expenditure). Now it is more clear I think.

Thanks a lot strangedays (a typical “strangedays” style of posting answers). But what ans will you pick ? I have read somewhere in the forum, folks using revenue test for answering such questions. Don’t know what it is ??

damn, you’re right. i should have taken a little more time to think about it. opps.

thunderanalyst Wrote: ------------------------------------------------------- > Thanks a lot strangedays (a typical “strangedays” > style of posting answers). > But what ans will you pick ? I have read somewhere > in the forum, folks using revenue test for > answering such questions. Don’t know what it is ?? Well, I pick the wrong answer before. But after reading carefully I think C is the best answer as looking at the initial question: “When a consumer’s demand for a good is inelastic (so here it should be read as “demand will not change”) , a higher price will”: C) lead to an increase in total expenditures for the good Therefore as a Effect-Consequence relationship.

Don’t draw your demand curve as a vertical line, and you will get it right. With a vertical line, you would pick A.

Dreary Wrote: ------------------------------------------------------- > Don’t draw your demand curve as a vertical line, > and you will get it right. > With a vertical line, you would pick A. Really? with a vertical line i would pick C now. I think the supply curve moves to adjust for increase in price expenditures = price * quantity sold so increase in Exp = increase in Price * Q (unchanged)

It doesn’t say it’s perfectly inelastic which could be A, only that it is inelastic. A good can still be inelastic with a negative price elasticity. Think of the elasticity rev curve. A higher of an elastic good decrease total revenue to the supplier (decrease expenditures) so a higher price of an inelastic good will increase total revenue (increase expenditures). A should be wrong since quantity can change with an inelastic price sensitivity. C makes more sense in this case.

Vertical line is only appropriate with Perfect inelasticity. Inappropriate for this question. I good with a -.5 price elasticity is technically inelastic (less than 1) but quantity demanded at a higher price will still change, no? I believe they are coming at this from the Revenue effect of elasticity.

Shabadoo1 Wrote: ------------------------------------------------------- > Vertical line is only appropriate with Perfect > inelasticity. Inappropriate for this question. > > I good with a -.5 price elasticity is technically > inelastic (less than 1) but quantity demanded at a > higher price will still change, no? > > I believe they are coming at this from the Revenue > effect of elasticity. Well, but a short cut to give a quickly answer… revenue effect of elasticity its just another word to show the relationship between total revenues-quantity sold (which graphically is a curve such the laffer one). At the end of the story: 1). When demand is elastic, price and total revenue move in the opposite direction. 2). When demand is inelastic, price and total revenue move in the same direction.