Sandra consumes two goods: tea and coffee. Her demand for tea is inelastic, while her demand for coffee is elastic.

Sandra consumes two goods: tea and coffee. Her demand for tea is inelastic, while her demand for coffee is elastic. If there is an increase in the price of both tea and coffee, ________.

(a) Sandra's expenditure on both tea and coffee will increase

(b) Sandra's expenditure on both tea and coffee will decrease

(c) Sandra's expenditure on coffee will increase and her expenditure on tea will decrease

(d) Sandra's expenditure on tea will increase and her expenditure on coffee will decrease

Expert Solution

Answer : The answer is option d.

Because when demand is inelastic for a good then if price rise then quantity demanded either remains unchanged or it change slightly. But in case of elastic demand if price rise for a commodity then quantity demanded decrease too much. So, based on given information the demand is inelastic for tea where the demand is elastic for coffee. Now as the price rises for both tea and coffee and as the demand is inelastic for tea and as the demand is elastic for coffee, hence the expenditure on tea increases where the expenditure on coffee decreases for Sandra. Thus, option d is correct.

Option a is incorrect. Because it states that the expenditure increases for both tea and coffee where from the above discussion we get that the expenditure increases for tea and the expenditure decreases for coffee.

Option b is incorrect. Because it states that the expenditure decreases for both tea and coffee where from the above discussion we get that the expenditure increases for tea and the expenditure decreases for coffee.

Option c is incorrect. Because it states that the expenditure increases for coffee and the expenditure decreases for tea. But from the above discussion we get that actually the expenditure increases for tea and the expenditure decreases for coffee.

Thus, options a, b and c are incorrect.

Rahul Sunny answered 2 years ago

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