Question

Given below are two statements, one is labelled as Assertion (A) and other one labelled as Reason (R).
Assertion (A): The total expenditure made by a consumer on a normal good decreases with the increase in its price.
Reason (R): The price elasticity of demand for the good is elastic ($\text{E}_p > 1$). In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A).
• B. Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).
• C. (A) is correct but (R) is not correct.
• D. (A) is not correct but (R) is correct.

Hint:

Elastic demand (\(\text{E}_p > 1\)): Price up $\to$ Expenditure down. Inelastic demand (\(\text{E}_p < 1\)): Price up $\to$ Expenditure up.

Answer 1

The Correct Option is D

Assertion (A) is incorrect: For a normal good, when the price increases, the quantity demanded decreases due to the law of demand. However, whether total expenditure (price × quantity) decreases depends on the price elasticity of demand (\(\text{E}_p\)). If demand is elastic (\(\text{E}_p > 1\)), a price increase leads to a proportionally larger decrease in quantity demanded, reducing total expenditure. If demand is inelastic (\(\text{E}_p < 1\)), the quantity decrease is smaller, increasing total expenditure. Since (A) claims total expenditure always decreases, it is not universally true for all normal goods. Reason (R) is correct: Elastic demand (\(\text{E}_p > 1\)) means that a price increase results in a significant drop in quantity demanded, reducing total expenditure. However, (R) does not fully explain (A) because (A) is incorrect in its generalization. Thus, option (D) is correct.

Answer 2

Using the total-expenditure and elasticity relationship:
Total expenditure (equivalently, total revenue) is \(TE = P \times Q\). The standard relationship between price change and total expenditure is: a rise in price increases total expenditure when demand is inelastic (\(E_p < 1\)), leaves it unchanged when unit elastic (\(E_p = 1\)), and decreases it when demand is elastic (\(E_p > 1\)). Assertion (A) claims total expenditure "decreases with increase in price" for a normal good unconditionally, but this is only true in the elastic case; for an inelastic normal good, expenditure would rise instead. Since (A) is stated as a general rule without the elasticity condition, it is false. Reason (R), which correctly states that the good's demand is elastic (\(E_p > 1\)), is a true and independently valid statement about elasticity, even though it does not rescue the incorrect generalization in (A). Hence (A) is false while (R) is true, matching option (4).