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Under the total outlay method, if a rise in the price of a good causes the total expenditure (total revenue) on it to fall, the price elasticity of demand is:
AExactly equal to zero
BEqual to unity
CLess than unity (inelastic)
DGreater than unity (elastic)
Answer & Solution
Correct answer: D. Greater than unity (elastic)
1. In the total outlay method we watch total expenditure as price changes.
2. If a price rise makes total expenditure fall, the quantity effect dominates the price effect.
3. This indicates elasticity greater than one.
4. So demand is elastic, with price elasticity greater than unity.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.25_
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