If the price of a product falls and total expenditure of consumers remains unchanged the demand is
Unitary elastic
Marshall’s total outlay (total expenditure) method judges price elasticity of demand by how consumers’ total expenditure \(TE = P \times Q\) responds to a price change.
Step 1 — If price falls and total expenditure rises, the quantity rises proportionately more than the price fell, so \(e_p \gt 1\) (elastic).
Step 2 — If price falls and total expenditure falls, quantity rises proportionately less, so \(e_p \lt 1\) (inelastic).
Step 3 — If price falls and total expenditure stays the same, the proportionate rise in quantity exactly offsets the fall in price, so \(e_p = 1\), which is unitary elastic demand; the demand curve is then a rectangular hyperbola.
Elastic demand would make total expenditure rise when price falls. Perfectly elastic demand is a horizontal curve where the slightest price change causes an infinite change in quantity, so it cannot describe a finite price fall that leaves spending unchanged. Perfectly inelastic demand leaves quantity unchanged, so total expenditure would fall in proportion to the price.
Unitary elastic option is correct.
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