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1 September, 06:34

Suppose the own price elasticity of demand for good X is - 0.5, and the price of good X increases by 10 percent. What would you expect to happen to the total expenditures on good X?

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  1. 1 September, 06:45
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    a 10% increase in price will reduce the demand and total expenditures on good X by 5%.

    Explanation:

    Price elasticity of demand (PED) is the degree of responsiveness of demand to a change in price.

    Where a percentage change in price produces a more than a proportional change in quantity, we say the product is price elastic. On the other hand, where a change in price produces a less than a proportional change in quantity demand, then demand is price inelastic

    PED is computed as follows:

    PED = % change in quantity / % change in Price

    So we can apply this formula to this question

    0.5 = m/10

    m = 0.5 * 10

    m = 5.

    m = 5%

    From the computation above, it is deduced that a 10% increase in price will reduce the demand and total expenditures on good X by 5%.
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