When a price falls, a proportionately larger rise in quantity demanded causes total expenditure to

• A. rise, indicating elastic demand.
• B. fall, indicating inelastic demand.
• C. remain unchanged, indicating unit elastic demand.
• D. not be determinate from this information.

Answer: (A)

The main idea is how total expenditure (revenue) responds to a price change, which depends on elasticity. Total expenditure equals price times quantity (TR = P × Q). If the price falls and the quantity demanded rises by a larger proportion than the price falls, the product P × Q increases. This happens when demand is elastic (elasticity > 1). For example, a price drop of 10% paired with a 20% rise in quantity gives a TR of 0.9P0 × 1.2Q0 = 1.08P0Q0, an 8% increase in revenue. Therefore, the correct interpretation is that total expenditure rises due to elastic demand.

If demand were inelastic, the quantity wouldn’t rise enough to offset the price drop, so TR would fall. If demand were unit elastic, the percentage change in quantity would exactly offset the price change, leaving TR unchanged.