Suppose that the price elasticity of demand for grapefruit is -2.8. The introduction of a new variety that is cheaper to grow should cause consumer expenditures for grapefruit to:Question 7Select one:a.rise.b.fall.c.remain unchanged.d.it is not possible to answer with the information given.
Question
Suppose that the price elasticity of demand for grapefruit is -2.8. The introduction of a new variety that is cheaper to grow should cause consumer expenditures for grapefruit to:Question 7Select one:a.rise.b.fall.c.remain unchanged.d.it is not possible to answer with the information given.
Solution
The price elasticity of demand for grapefruit is -2.8, which means that the demand for grapefruit is elastic. This means that a 1% decrease in price will result in a more than 1% increase in quantity demanded (in this case, 2.8% increase).
If a new variety of grapefruit is introduced that is cheaper to grow, this would likely lead to a decrease in the price of grapefruit. Given the elasticity of demand, consumers would respond to this price decrease by increasing their quantity demanded for grapefruit by a larger percentage.
However, the effect on total consumer expenditure (price x quantity) depends on the relative changes in price and quantity. In the case of elastic demand, the percentage increase in quantity demanded is greater than the percentage decrease in price, leading to an increase in total expenditure.
So, the answer is:
a. rise.
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