10.In the small town of Springfield, Duffman observes that the price of beer has fallen. Duffman...
10.In the small town of Springfield, Duffman observes that the price of beer has fallen. Duffman concludes that the total amount of money spent buying beer has to fall since the price of beer is lower now. Is he correct? Why or why not? Clearly explain your answer.
Homework Answers
He may or may not be correct. He is correct only when the demand for beer is relatively inelastic because in that condition, decline in the price level will increase the quantity demanded but by less than proportionately so that total revenue or total expenditure will decline.
However when the demand for beer is relatively elastic, a price fall will result in an increase in the quantity demanded by more than proportionate decrease in price so that the overall expenditure can be increased as well. This shows that total expenditure will either rise or fall depending upon the price elasticity of demand for beer. Inelastic demand will cause the expenditure to fall and elastic demand will increase the total expenditure in the event of a price fall for beer.
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