Our consumer here is going to respond to a drop in the price of long distance calls by calling more. In this case, we need to read what our choices are before we know what the question is asking. A quick look at the choices shows that the question has to do with what happens to her total expenditure on long distance calls when the price drops. We've dealt with this issue already, though not exactly in this form. If price drops, in this case to 1/2 of what it was, total expenditure will either increase or decrease. Which, depends on whether demand is elastic or inelastic. We know when demand is elastic %Q > %P. So, a reduction in price leads to an increase in total expenditure. On the other hand if demand is inelastic then %Q < %P and a reduction in price leads to a reduction in total expenditure.

12. Candice currently spends $200 per month on long distance telephone calls. If the telephone company decides to reduce the rate from 10 cents a minute to 5 cents a minute then:

1. whether she spends more or less than $200 per month depends on whether long distance telephone calls are a normal good or an inferior good. This question focuses on price elasticity; income elasticity doesn't tell us if expenditure will rise or fall when price changes.
2. the fact that demand curves are downward-sloping implies she will spend more than $200 per month on long distance telephone calls. This isn't true. Downward sloping demand only tells us that she calls more when price falls, but it doesn't tell us how much more.
3. she will spend less than $200 per month on long distance telephone calls because the new price is an effective price floor. This is just silly. The new price isn't a price floor. Even if it were, that wouldn't tell us what happens to total expenditure; only own price elasticity can tell us that.
4. whether she spends more or less than $200 per month on long distance telephone calls depends on whether her demand is elastic or inelastic. As we stated above, this is the correct answer.
5. she will spend more than $200 per month on long distance telephone calls because her demand shifted out. A change in price doesn't cause demand to shift, it simply causes the consumer to move along the demand curve; therefore, this can't be correct. Even if we knew that demand shifted out for some reason we would need to know how large the shift was to know what happens to total expenditure.