CFA Practice Question

CFA Practice Question

If the demand curve for a good is relatively inelastic, an increase in its price will ______
A. increase the quantity purchased and increase total expenditure on the good.
B. reduce the quantity purchased and reduce total expenditure on the good.
C. reduce the quantity purchased and increase total expenditure on the good.
Explanation: Since demand is relatively inelastic, a price increase will decrease quantity demanded. However, the decrease in quantity demanded will be less than the percentage increase in price. As a result of this difference, total expenditure on the good will increase.

User Contributed Comments 11

User Comment
dimanyc don't understand part starting from "as a result of this diff-ce". Can anyone explain? thx
egghead price rose by 10% whilst quantity fell let's say 7% resulting in increased expenditures
PRICHARD Total expenditure = the total amount used to buy the goods (P X Qd)
jd2442424 pg16 of Econ: When demand is inelastic, a price cut decreases total revenue.
iambroke so both revenue and expenditure increases?
mindi it makes it easier to see when you draw a diagram. draw a very steep downward sloping demand curve and choose two points on the curve and trace lines to the x- and y- axis. at each point, the area bounded by the trace lines is the expenditure. you will see that the area is bigger when you move to a higher price.

get it? kinda hard to explain it in words, but a diagram really helps, and it's much faster!
soukhov relatively inelastic demand is NOT horizontal line
MaresaJaden Think about it this way, when demand is relatively INelastic, it will change less for a given change in price. So price changes, but the demand change is less. This will increase expenditure and revenue.
farhan92 i chose B. If the cost was rising and you increase prices and demand is relatively inelastic so if cost is the same and price increases the profit margin is higher and the consumer is paying a higher percentage of the cost..Will have to look over this! Econ was one of the easiest modules and ive done poorly on it!
Amir1 When demand is inelastic, revenue and price change move in the same direction.
will080912 Thank you mindi, I draw the diagram and helped me a lot.
Expenditure is = P x Q
So because is inelastic an increase in 50% in price will lead to a decrease in quantity demanded of 10% (For example). So if you bought before Q=5 for a price P=10 (expenditure 50), now you will buy Q=4 for a price P=15( expenditure= 60).
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