Reference no: EM132456351

What would the answer be to this and why?

Consider the market for a product in two separate markets, Melbourne and Sydney. The demand curve in Melbourne for the good is P = a - m.qM, where qM is the quantity demanded in Melbourne and P is price. Both a and m are positive constants. Similarly, in Sydney the market demand is P = a - s.qS, where qS is the quantity demanded in the Sydney market and s > 0. The price P is the same in both markets and m > s.

Now assume that there is an exogenous and small increase in price P by the same amount in both markets (that is there is a small increase the price in both markets to P'). Your research assistant - a brilliant economist tells you that total expenditure (or total market revenue) on the product in Melbourne is unchanged. Which statement is true?

• It is not possible to predict what will happen to total expenditure on the product in the Sydney market.
• Total expenditure in the Sydney market will definitely fall following the price increase.
• Total expenditure in Sydney will increase following the price increase.
• Total expenditure in Sydney will remain unchanged following the price rise, as this is what happened in Melbourne.
• None of the above.