Spending on discs after a price cut

Use the total revenue test. Total spending on a good is price times quantity. When price falls, quantity demanded rises, and what happens to spending tells you about elasticity:

1. Spending rises: quantity rose by a larger percentage than price fell, so demand is elastic.
2. Spending falls: quantity rose by a smaller percentage, so demand is inelastic.
3. Spending stays the same: the two percentage changes offset exactly, so demand is unit elastic.

This consumer spends the same total after the price cut, which is the third case. Demand for compact discs is unit price elastic over this change.

Each choice

• A. Inferior is about how demand responds to income, not to the good's own price. The question changes only the price of compact discs.
• B. A change in the good's own price moves the consumer along the demand curve. It changes quantity demanded, not demand, which only shifts for other reasons such as income or tastes.
• C. Perfectly elastic demand is a horizontal line: any price drop would bring an unlimited rise in quantity, and spending would not stay the same.
• D. Perfectly inelastic means the consumer buys the same number of discs at any price. Then a lower price would cut total spending, not keep it unchanged.
• E (correct). Equal spending before and after means the percentage rise in quantity exactly matched the percentage fall in price.